Implementing Audit Procedures(International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 14 JUNE 2004 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Paper T8(INT) ALL FOUR questions are compulsory and MUST be attempted 1 M, a large manufacturing company limited by liability, has all of its production, stores and head office buildings situated on a single site. The buying and accounts departments are located in the head office building. Following a recent take-over of the company, the new directors have been informed that there is an inadequate level of internal controls over the Purchases and Trade Payables system. Weaknesses include an absence of control procedures and adequate documentation. Similarly there has been no attempt to use supplier statements to supplement other controls within the system. A ‘batch entry batch processing system’ is used throughout the company’s accounting system, which incorporates fully integrated payables and general ledgers. Required: (a) State FOUR objectives of having internal controls in a Purchases and Trade Payables system. (b) Identify the internal controls that should exist in M over the following: (i) Requisitioning and authorisation of purchases; (4 marks) (ii) Acknowledgement of the receipt of goods and the return of goods to suppliers; (iii) Checking and authorisation of purchase invoices prior to batching for processing through the computerised accounting system. (15 marks) (c) Explain how supplier statements should be used to supplement other controls in the Purchases and Trade Payables system of M. (3 marks) (d) State the meaning of the term ‘batch entry batch processing system’ and explain the use of control totals in such a system. (3 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com 2 J.J. is a small limited liability company which sells mineral water dispensing machines and bottles of mineral water. The company’s only shareholders, directors and employees are brothers Joe, Jim and Josh Alsage. The company’s manual accounting system is simple in design and includes a sales day book, a cash book and trade receivables and general ledgers. Josh maintains the books of prime entry but not the trade receivables and general ledgers. These ledgers are written up by an independent qualified bookkeeper. J.J. focuses on achieving bulk order high value sales to multi-site corporate customers. Consequently during the year ended 31 May 2004 there were only 48 sales invoice transactions. All sales are made on credit terms and invoices are priced from a standard product price list authorised by the directors. The control procedures employed over sales include the use of pre-numbered multi-part despatch notes and sales invoice stationery. You have been assigned to the audit of the financial statements of J.J. for the year ended 31 May 2004. Your audit manager has explained why a direct verification (vouching) approach to the audit will be adopted as opposed to a systems based approach, and your first task will be to work on the area of sales. You are not required to verify entries in the company’s trade receivables ledger or general ledger. Required: (a) (i) Summarise what is meant by a ‘systems based’ approach to an audit. Your answer should refer to the stages of such an approach. (10 marks) and (ii) Summarise what is meant by a ‘direct verification (vouching)’ approach to an audit, explaining why the approach is often more appropriate when auditing the financial statements of a small limited liability company. (8 marks) (b) State TWO main common objectives of vouching despatch notes, sales invoices and the sales day book, when auditing the sales of J.J. (4 marks) (c) State THREE checks you would carry out to verify the completeness of processing of individual invoices, and THREE checks you would carry out to verify the accuracy of processing of individual invoices when vouching the sales invoices of J.J. (3 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com [P.T.O. 809 Janice.blogspot. a limited liability company. (6 marks) (b) (i) Explain the difference between the ‘positive’ and ‘negative’ methods of obtaining direct confirmation of trade receivables balances and describe the circumstances in which the latter should be used.3 An analysis of the trade receivables of Zais. Janice mentioned that it is not always appropriate to adopt a sampling approach when testing various populations during the course of an audit.500. your audit supervisor. (2 marks) (c) Explain the significance of including: (i) All accounts with balances in excess of $7.406 $165.842 $130.500 $0 to $2.501 to $10. In the course of her conversation with you. (5 marks) (ii) Explain why none of the employees of Zais should have any influence on the selection of trade receivables balances to be confirmed. You are to use the positive confirmation method. has instructed you to obtain direct confirmation of trade receivables using a sample size of 70 trade receivables balances. as at 31 May 2004 reveals the following: Balance Level Over $15. in the sample of trade receivables balances of Zais to be confirmed.975 ($621) $703.100 $174. which would require special attention and would need to be represented in the sample of trade receivable balances to be confirmed. (6 marks) (d) Describe the other types of account in addition to those stated in (c) above.001 to $15.000 $2.000 $7.000 $10.107 $139.501 to $7.500 Credit Balances Total Number of Balances 3 10 19 51 146 7 236 Value $94.com . (6 marks) (25 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (ii) Some accounts with zero balances. Required: (a) State FOUR circumstances during the course of an audit when it would not be appropriate to adopt a sampling approach to testing. a long established firm. The wife of one of the audit managers at Pebury and Company – a large audit firm and auditors of Adlin. could pose a threat to auditor independence. he does not have to be seen to be independent. The projected annual fee attributable to the third company is $80. Thomas Arn has recently approached Bollies with a view to appointing them as auditors to a third limited liability company under his control. to plan the final audit procedures for the year ending 31 July 2004. (10 marks) (b) ACCA’s Rules of Professional Conduct describe various situations and relationships. Individual annual membership normally costs $3. which if existing. Immediately prior to her appointment she had been employed by one of Adlin’s competitors.000. A week later. The annual total fee income of Bollies is $830. an entrepreneur with a very dominant personality. a limited liability company.000 and the offer was not made to anyone else. audit the financial statements of two private limited liability companies owned by Thomas Arn. has recently been appointed as the Financial Director of Adlin.blogspot. At a recent training seminar. a limited liability company.com . each of the five partners of Poynt and Co received an unsolicited letter from the Managing Director of Geeclubs offering one year’s free membership at one of the company’s golf and country clubs with effect from 1 August 2004. (ii) recommend the appropriate action to be taken by the audit firm to safeguard against any threat identified. Bollies. the following scenarios were presented for discussion: – On 20 May 2004. Each of the directors of Adlin is entitled to an annual bonus based on the reported profit of the company. Required: Comment on the above statement ensuring that you include an explanation of the term ‘professional objectivity’ and include commentary on the validity of the statement.000.000 and the combined audit fees attributable to the two companies is $72. (15 marks) (25 marks) End of Question Paper 5 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.4 (a) Provided an auditor possesses professional objectivity. – – Required: For each of the above scenarios: (i) comment on any concerns you may have regarding the threat to auditor independence and objectivity. The guidance notes provide examples of appropriate actions that can be taken to safeguard against the loss of independence where such situations and relationships exist. the audit engagement partner of Poynt and Co visited the offices of Geeclubs. blogspot.Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com .blogspot. Reconciliations should be prepared by individuals separated from the processing of purchase invoices and payments to suppliers (to prevent the possibility of fraudulent activity). for the approval of invoices relating to utilities and other sundry services received not subject to the normal purchase ordering and goods received procedures.com . June 2004 Answers Goods and services are supplied in accordance with the requirements of an entity in terms of quality and quantity and at the best available price. goods received and payment functions. A Large Manufacturing Company 1 (a) The objectives of a Purchases and Trade Payables system are to ensure that: (i) (ii) Goods and services for an entity are only requisitioned when required. Strict controls should be maintained over the security of purchase order stationery which should be pre-numbered. quality and quantity. (v) Payment is made to suppliers on a timely basis for goods and services received by an entity. (iii) Checking and authorisation of purchase invoices prior to batching. Invoices should be ‘matched’ with purchase order(s) and goods received note(s) and discrepancies resolved before further processing. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (vi) All bona-fide transactions relating to the purchases of goods and services are entered on a timely basis into the accounting records of an entity. with copies being provided to the accounts department for matching to subsequent goods received documentation and invoice(s) as appropriate. A copy should also be despatched with the specified goods returned for acknowledgement of delivery and returning to M. Purchase order stationery should be multi-part. Requisitions for the purchase of goods and services should be communicated on specified forms with uniform detail requirements including justification for the purchase. All goods received should be inspected and checked to copy purchase orders as to classification. (ii) Acknowledgement of the receipt of goods and return of goods to suppliers. (Full marks will be awarded for identifying FOUR of the above or other appropriate objectives). – – (c) Where received. Goods returned to suppliers should be recorded on pre-numbered multi-part stationery with one copy being forwarded to the accounts department for matching to credit note(s). involving appropriate responsible officials of M. but where this is not practical they should be subject to close independent supervisory control. Where invoices are forwarded to responsible officials of the company. – – – – – – Individuals involved in the processing of purchase invoices through the company’s accounting system should be separate from the ordering. (iv) Invoices paid by an entity relate to goods and services actually received. (iii) Only goods and services required by an entity are accepted as a basis for subsequent payment. The task of raising purchase orders should be allocated to responsible buying officials of M separate from the goods received and accounting functions. – – – – Goods received personnel should be separate from the ordering and accounting functions of M. a detailed register should be maintained to track their progress as appropriate. invoices should be pre-numbered in sequential order to facilitate completeness of processing. (b) The following procedures and control documentation should exist over the: (i) Requisitioning and authorisation of purchases – – – – – The task of requisitioning for the purchase of goods and services should be allocated only to specified responsible employees of the company.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) M. All purchase invoices received by M should be immediately forwarded to the company’s accounts department. Prior to batching. Goods accepted should be recorded on pre-numbered multi-part stationery with one copy being forwarded to the accounts department for subsequent matching with purchase order(s) and invoice(s). There should be separate approval procedures.blogspot. Invoice details and arithmetical accuracy should be checked (and evidenced as such) and discrepancies resolved before further processing. Matched invoices should be forwarded to the appropriate responsible official(s) in the company for authorisation and approval of accounts (general ledger) coding as appropriate. statements from suppliers should be reconciled as soon as practicable with the relevant supplier accounts in the trade payables ledger of M. A copy should also be forwarded to the goods received department for checking to subsequent deliveries. Determine the level of detailed testing of transactions and balances to be carried out dependent on the outcome of the tests above. Consequently. Preparation procedures should involve the use of control totals (pre-lists) established by monetary value. Check for accuracy of processing by: – – – Comparing prices charged on sales invoices to the authorised price list. If in a particular area. Any differences identified between supplier statements and trade payables ledger accounts may reveal the existence of unprocessed invoices for goods or services received. where appropriate. to determine the level of detailed testing of transactions and balances. J J. Evaluate the extent to which it appears that reliance can be placed on the system to prevent error. If there is imparity between a pre-listed total and processed totals. (ii) A direct verification (or vouching) approach to an audit describes the approach when no reliance is placed on an entity’s system of internal control. and to identify errors in processing of purchase ledger transactions. More efficient audit approach. then immediate reconciliation is required in order to ensure the integrity of processing. – Due to regular fluctuation from one year to the next in sales. number of documents or a ‘hash total’ against which users can check data subsequently processed through the computer system and returned to them. Vouching invoices to the sales day book. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (c) I would: (i) Check for completeness of processing of invoices by: – – – (ii) Testing the numerical sequence of the sales invoice raised. through which data is entered and processed in discrete batches. omission or fraudulent activity. (d) The term ‘batch entry batch processing system’ is used to describe a computer-based accounting system. – Internal controls used by large entities are usually not practical in small business e. Vouching individual invoices to the sales day book. Comparing sales invoices to customer orders and goods despatched notes.com . or even perhaps payments made on accounts but not received by suppliers. supervisory control may be lacking or inadequate. overhead costs and asset purchases. the use of analytical review as a substantive test is less effective. Any omissions or errors so revealed should be subject to immediate enquiry. This approach is often more appropriate when auditing the financial statements of a small limited liability company because: – Internal control procedures are often weak or easily overridden.The reconciliation of supplier statements supplements other controls over purchases and trade payables by helping to ensure completeness of. – The number of transactions and balances subject to audit will often be very low. dependent on the relative materiality of transactions and balances. accuracy and completeness of accounting for sales. to determine the level of detailed testing of transactions and balances. It will also be adopted when there is an absence of internal controls or where control is very weak. internal control procedures are deemed to be strong then the level of detailed testing may be reduced. – Record keeping is unsophisticated and easy to audit. (b) The main objectives are: (i) (ii) To confirm that all goods supplied during the period were duly invoiced. Conversely. (iii) To confirm the reliability. Checking calculations and additions of invoices (including any government taxes). limited segregation of duties.g. it is not uncommon for testing levels to be set at between 50% and 100% of the population. In summary when adopting this approach an auditor needs to: – – – – Ascertain and record the internal control system in operation. Perform tests of control (compliance tests) to confirm whether or not the preliminary evaluation of the control system is correct. The approach will be adopted when the number of transactions and balances subject to audit is very low.blogspot. Controls should ensure strong segregation of duties between the preparation of data for processing and the actual input and processing of the data through the computer system. To confirm that all invoices raised during the period related to sales of the company. A Limited Liability Company 2 (a) (i) A ‘systems based’ approach to an audit describes the approach adopted when reliance is placed on an entity’s system of internal control. where controls are weak then the level of detailed testing will have to be increased. (Full marks will be awarded for stating any TWO of the above or other appropriate objectives). profitability. (vii) Those on which round sum payments are constantly received. Where the population is very small and the results from sampling could not be relied on. (iv) Where the population is not homogenous and requires subdivision before sampling can be attempted. Whilst we may not have any reason to doubt the existence of zero balances on customer accounts. (vi) Where the costs of sampling outweigh the benefits as compared to 100% testing.com . (Full marks will be awarded for identifying FOUR of the above or other appropriate occasions). (xiii) Accounts which have been paid by the date of the examination. they would have a vested interest in diverting the auditor’s attention away from balances on accounts subject to such activity. (xii) Accounts with nil balance. – A substantial number of errors is not expected. Those which regularly exceed the authorised credit limit. (v) Those accounts on which balances have been written off as bad debts or in respect of which provision has been made. This type of confirmation should only be used when: – The audit client has a strong internal control system over sales and trade receivables. (viii) Those to which credit notes have been regularly posted. A Limited Liability Company 3 (a) A sampling approach to testing would not be appropriate in the following circumstances: (i) (ii) Where there is a statutory requirement to disclose specific items in the financial statements. (ii) Whilst the main objective of obtaining written confirmation is to confirm the existence of debts outstanding. By confirming all customer account balances in excess of $7. (x) Those which appear to have received unusually favourable treatment with regard to credit limits. as a consequence of cut-off errors (sales not recorded in the correct financial period). for example when conducting certain compliance tests. – The auditor has no reason to believe the debtors will disregard the request. (iv) Those which show higher/lower balances at the balance sheet date as compared to other times during the year. It will also assist us in interpreting the materiality of any errors brought to our attention from the balance of accounts tested. (ix) Those to which journal credits or journal debits have been regularly posted. for example purchase invoices and credit notes. mis-posting of cash receipts (payments made in advance of a sales transaction) or fraudulent activity (diversion of cash received from a customer combined with suppression of sales activity). The negative method requests that customers should only respond if they do not agree the balance on their account as shown in the audit client’s records. there are a variety of reasons as to why these could be stated incorrectly. – Other good corroborative evidence with regard to the existence of trade receivables has already been obtained from other tests carried out. (v) When the auditor is put ‘on enquiry’ for example when testing for fraud. This is a significant proportion of the total value of the population and inclusion should therefore assist us in reaching a confident conclusion on the accuracy of the reported trade receivables figure. payment period and discounts allowed. (xi) Those which apply to customers who are known to be ‘connected’ to Zais or its employees (related parties). a secondary objective is to test the propriety of controls actually exercised over the sales and trade receivables function. for example directors’ remuneration. (c) (i) (ii) (d) Accounts requiring special attention would include: (i) (ii) Those which have exceeded the normal credit period. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Confirmation of zero balance accounts will test for the occurrence of these events. we will ensure coverage of some 57% of the total value of the population before taking account of further balances for inclusion.ZAIS. (vi) Those on which there are regular contras with supplier accounts in the company’s trade payables ledger.blogspot. For example. – There are a large number of small balances.500. (iii) Where the population is small in number but comprises material individual balances or transactions. (b) (i) The positive method of obtaining direct confirmation of trade receivables balances is the process whereby letters are sent to customers asking them to forward written confirmation (or to provide details of any differences) of the balance on their account as shown in the audit client’s records. for example property additions. (Full marks will be awarded for identifying SIX of the above or other appropriate types of account). (iii) Those which have credit balances. Clearly if employees have been circumventing controls to conceal any (for example fraudulent) activity. This would not appear to represent a threat to the perceived objectivity of the firm with regard 12 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. the adoption of unacceptable accounting policies. the company may have unreasonable expectations as to how the audit firm may respond when coming across contentious issues in the company’s financial statements – for example. Currently fees receivable from the two connected companies owned by Thomas Arn. shareholders and users of financial statements may (albeit mistakenly). The nature of the audit function therefore demands that auditors are mentally independent and as such are totally objective in their audit approach. requires that members should strive for objectivity in all professional and business judgements. Such an approach involves careful selection of staff for specific assignments such that all members of the audit team are totally impartial. I consider the statement made to be invalid. who are free from any influence and pressure which might impair their judgement when carrying out their audit work. but in certain roles the preservation of objectivity needs to be protected and demonstrated by the maintenance of a member’s independence from influences which could affect his/her objectivity’. Given the size of the firm this should not unduly affect its operational efficiency. In order to add credibility to their reporting function it is important that auditors remain visibly independent. would be compounded by the fact that the financial director of the company will be entitled to an annual bonus based on the reported figures. In addition to the above. The fact that an audit manager of Pebury and Company is married to the new financial director of one of the firm’s audit clients. On this basis. there may well be a perception of impropriety with regard to the figures reported therein if her husband (as a senior member of the audit team) has a role in the audit function. The job of an auditor represents such a role. There is an assumption that the company’s management may have lacked objectivity when preparing the financial statements. and would strongly recommend that the partners politely decline the offer. with the consequence that they will not place reliance on the auditors’ opinion. The figure stated of 15% is an indicative figure only. I would be concerned that objectivity could be. Given that the financial director is responsible for the preparation of the company’s financial statements. Clearly she would have a vested interest in a high reported profit. represent 8·7% ($72. The Association’s Code of ethics then goes on to explain that (professional) ‘objectivity is a state of mind. therefore in order to add credibility to them it is important that they are audited by impartial professionals. the only people actually aware of their (mental) state of independence are auditors themselves. The belief that a company’s un-audited financial statements lack credibility. If they do not and are therefore not seen to be independent. or be perceived to be threatened.blogspot. clearly poses a potential threat to audit objectivity. Objectivity is ‘the state of mind which has regard to all considerations relevant to the task in hand but no other’. The Code points out that the public perception of a firm’s objectivity is likely to be in jeopardy where the fees for audit and other recurring work paid by one client or group of connected clients exceed 15% of the gross practice income. the timing of it (soon after the start of audit work) and the fact that it was made solely to the partners would alert me to the possibility that in return for the free membership. by the acceptance of goods and services from an audit client. given that their independence is ‘mental’.000). The value ($3.000) of individual golf club membership would not be considered to be modest and the threat to the audit objectivity of Poynt and Co (if the memberships are accepted) is compounded by the fact that the total value of offer to the firm is $15. relating to non-public interest and non-listed companies. is fundamental to the supposition that they need to be audited. no matter how they may argue that they are objective in their audit approach.000 (5 x $3.com . Given the total value of the offer.000) of Bollies’ gross practice income. Bollies ACCA’s Code of ethics gives clear guidance on the risk posed to objectivity as a consequence of undue dependence on an audit client stating that ‘objectivity may be threatened or appear to be threatened by undue dependence on any audit client or group of connected clients’. Pebury and Company ACCA’s Code of ethics gives clear guidance on the risk posed to objectivity as a consequence of family and other personal relationships stating that ‘objectivity may be threatened or appear to be threatened as a consequence of a family or other close personal or business relationship’. To avoid such a threat I would strongly recommend that the firm ensures that the audit manager has no involvement whatsoever with that audit (or any other) assignment relating to Adlin.000/$830. I would also be concerned as to the motive of the managing director in making the offer. However. Given this situation it is important that Pebury and Company should be seen to be totally objective in their audit approach. My concern as to the possibility of perceived impropriety with regard to the figures reported in the financial statements. take the view that the auditors have not been objective in their approach. Given the above. stating that ‘goods or services should not be accepted by a practice or anyone closely connected with it unless the value of any benefits is modest’. (b) Poynt & Co ACCA’s Code of ethics gives clear guidance on the risk posed to objectivity.PROFESSIONAL OBJECTIVITY 4 (a) The Code of ethics as set out in ACCA’s Rules of Professional Conduct. and in the circumstances it may be prudent for Bollies to politely decline the further audit appointment. However.blogspot. Given this trait. 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. This could call into question the firm’s objectivity with regard to all three audit assignments. For example. However Thomas Arn is an entrepreneur with a very dominant personality. acceptance of the third audit appointment would mean that 16·7% ($152.000/$910. notwithstanding any doubts as to their perceived objectivity. the partners should be alert to the possibility that situations might arise on any of the audit assignments wherein he could use the threat of the loss of all three audit assignments (and associated fees) to put undue pressure on the firm. The partners should pay particular attention to the possibility of this potential threat before deciding whether to accept the further appointment. Such safeguards should be subject to an annual independent review by a partner unconnected with the audits and may include the employment of a different audit engagement partner and suitably qualified audit teams on each of the three audits.com . If the firm does proceed with the additional appointment I would strongly recommend that they should protect against the loss of independence on each of the audits by implementing additional safeguards to maintain objectivity. (Full marks will be awarded for coverage of any FIFTEEN relevant points pertaining to each scenario with a maximum of NINE marks being available for each scenario).to the existing audits.000) of the firm’s gross practice income originates from the three companies owned by Thomas Arn. Commercial considerations may encourage the partners of Bollies to accept the third audit appointment. he may request the firm to take an unusually optimistic view as to the recoverability of unpaid debts. FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com . Generally up to 11/2 marks per point up to a maximum of (b) Statement of TWO main objectives of vouching despatch notes. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade.com . sales invoices and the sales day book. Generally up to 11/2 marks per point up to a maximum of (ii) Summarised explanation of what is meant by a ‘direct verification (vouching)’ approach to an audit and explanation of why the approach is often more appropriate for the audit of a small limited liability company. Acknowledgement of the receipt of goods and the return of goods to suppliers. After marking each question. and the marks adjusted to ensure that the total awarded is fair. (ii) and (iii) up to a maximum of (c) Explanation of how suppliers’ statements should be used to supplement other controls. with a maximum of 9 marks (6 x 11/2) for each function (i). M. Generally 1 mark per point up to a maximum of 2 marks for each objective (2 x 2) (c) Statement of SIX sales invoice checking procedures. the candidate should be given full credit for such points. consideration should be given to the depth and relevance of points provided by each candidate when answering the question. Generally 1 mark per point up to a maximum of (d) Stating the meaning of the term ‘batch entry batch processing system’. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. Generally 1 mark per objective up to a maximum of (b) Identification of the internal controls that should exist over: (i) (ii) Requisition and authorisation of purchases. for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. If the answer is of a pass standard then it should be awarded a minimum of 40%. Generally 1/2 mark per point up to a maximum of (3 marks) Total (25 marks) (4 marks) (8 marks) (10 marks) 15 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. so if a candidate concentrates on a few points then they should not be given as much recognition. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. A Limited Liability Company 2 (a) (i) Summarised explanation of what is meant by a ‘systems based’ approach to an audit. if it is below a pass standard then it should be awarded less than 40%. In conclusion. and their overall mark should be lower than a candidate who provides a range of points.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2004 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. Generally 1/2 mark per point up to a maximum of (2 marks) Total (25 marks) (3 marks) (1 mark) (15 marks) J J. However. A Large Manufacturing Company 1 (a) Stating objectives of the internal controls exercised over a Purchases and Trade Payables system. Explanation on the use of control totals in such a system. Generally 11/2 marks per point.blogspot. the total mark awarded should be evaluated to assess whether it is fair. The majority of the questions require several points to be included within the answer. (4 marks) (iii) Checking and authorisation of purchase invoices prior to batching for processing through the computerised accounting system. including specific concerns and recommendations with a maximum of 9 marks (9 x 1) for each scenario up to an overall maximum of (15 marks) Total (25 marks) (6 marks) (4 marks) 16 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.500 Some accounts with zero balances. (6 marks) (2 marks) (3 marks) (2 marks) (6 marks) Generally 1 mark per point with a maximum of 3 marks for (i) and (ii) up to a maximum of (2 x 3) (d) Description of SIX types of activity which would require special attention and representation in the sample: Generally 1 mark for each type of activity up to a maximum of (6 x 1) (6 marks) Total (25 marks) PROFESSIONAL OBJECTIVITY 4 (a) Comment on statement including definition of (professional) objectivity. Generally 1 mark per point up to a maximum of Description of circumstances when a negative method should be used. Generally 1 mark per point up to a maximum of Other commentary: Generally 1 mark per point up to a maximum of (b) Commentary on objectivity/independence issues arising from the scenarios involving: – Poynt & Co – Pebury and Company – Bollies Generally 1 mark per point for commentary on the various issues. Generally 1 mark per point up to a maximum of (c) Explanation of the significance of inclusion in the sample of: (i) (ii) Accounts with balances in excess of $7. A Limited Liability Company 3 (a) Statement of FOUR circumstances when a sampling approach would not be appropriate: Generally 11/2 marks per occasion up to a maximum of (b) (i) Explanation of the difference between the positive and negative confirmation methods. Generally 1 mark per point up to a maximum of (ii) Explanation as to why employees should have no influence on the selection of the trade receivables balance to be confirmed.blogspot.ZAIS.com . Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 13 DECEMBER 2004 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com Paper T8(INT) .blogspot. prior to the request being made for the production of the monthly computerised wage slips. The company employs an interviews manager to control 40 interviewers who conduct interviews with members of the public at random. Head office employees include a company accountant. (4 marks) (b) State the internal control procedures that Opiniol should adopt over the updating of its wages master file with regard to interviewer starters and leavers.com . 2. a wages supervisor and three wages clerks. deployment to assignments. (9 marks) (c) State the internal control procedures that Opiniol should adopt over the completion and authorisation of. overseeing of interview work and for the authorisation of pay rates and bonus payments.blogspot. the amendments made since the last report. He is responsible for the recruitment of interviewers. The interviews manager is based at the company’s head office.ALL FOUR questions are compulsory and MUST be attempted 1 Opiniol is a limited liability company which carries out public opinion surveys. A current period payment details report – showing gross payment. and the number of existing employees on file. The company has a good control environment including appropriate segregation of duties throughout the specific areas of the business. Wage slips – the computerised production of which is requested only after other control procedures employed have ensured that information provided on the current period payment details report (above) is in agreement with a hash total representing gross wages input. The interviewers are paid monthly in arrears for hours worked. and the computer processing of interviewers’ time sheets. They submit their monthly time sheets to the company’s head office for processing and the company operates a separate monthly payroll specifically for interviewers’ wages. Required: (a) State FOUR objectives of the internal controls that should be exercised over a wages system. deductions and net payment amounts – by employee and in total. with hourly rates and productivity bonus payments being dependent on surveys undertaken. A master file update report – detailing the update report number. together with the accounting and administration departments. (12 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. 3. The company’s wages software program produces on request: 1. Consequently 18 full-time shop and yard staff are employed at each site together with varying numbers of part-time and temporary employees. Each site sells a wide range of products including timber and consumable materials. limited liability company. trading as builders’ merchants. 5. All sites comprise a shop and a yard with the largest site also accommodating the company’s head office. These include mechanical shovels. customers may either collect goods directly or take advantage of the company’s delivery service. 6. (6 marks) (ii) For each procedure provide TWO examples of its use during the course of an audit stating clearly in each example the purpose of carrying out the procedure. 2.T. The company operates from 14 sites around the country. . Wizzin is a long established. dumper trucks. the company has had declining profits in recent years. whilst very large stockpiles of sand and gravel are kept in each yard to meet customer demand. (9 marks) (b) State with reasons FIVE factors that would affect the initial assessment of inherent risk associated with the audit of the financial statements of Wizzin. (16 marks) (25 marks) 3 (a) Required: Explain what is meant by the term ‘audit evidence’ and state what it comprises. 4. decorating and general building products.2 The directors of Wizzin have asked your firm to quote for the appointment as the company’s new auditors. Owing to a large influx of competitors into the market place. The costs of these programmes were substantial and have been financed by bank borrowing. Required: (a) Describe THREE matters the audit engagement partner of your firm should consider before deciding whether to quote for the appointment as auditors to Wizzin. (16 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com [P. closing only for public holidays. 3. Wizzin owns a large volume of mobile plant and machinery to service its yard and delivery operations. Each site is open throughout the year.blogspot. (b) An auditor may obtain audit evidence by one or more of the following procedures: (1) (2) (3) (4) Inspection Observation Recalculation Analytical Procedures (3 marks) Required: (i) Explain what each of these procedures involves. although the directors appear not to be unduly concerned about the company’s ongoing trading.O. Ranges of tools and equipment are also available both for sale and for short-term hire. lorries and vans. The next financial statements due for audit will be those for the year ending 31 March 2005 and from discussions with the directors your firm’s audit engagement partner has ascertained the following information: 1. In order to attract new customers all of the shops have recently undergone major repair and refurbishment programmes. but where credit terms are granted. A cash sales policy applies to most customers. (8 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (b) Explain FOUR matters that external auditors should consider when evaluating and testing work carried out by internal auditors with a view to relying on it to reduce their own work.com .blogspot.4 Whilst there is a difference between the roles of internal auditors and external (registered) auditors. Required: (a) (i) Contrast the objectives and scope of an internal auditor’s work for a limited liability company with that of an external (registered) auditor auditing its financial statements. (8 marks) (c) State FOUR of the fundamental principles of ACCA’s Code of ethics. they often liaise on various matters and a Chartered Certified Accountant employed in either capacity has an obligation to adhere to the Fundamental Principles of the Code of ethics as set out in ACCA’s Rules of Professional Conduct. (5 marks) (4 marks) (ii) Discuss the extent to which each should be expected to detect fraud. blogspot.com .Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. blogspot.com .FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Any discrepancies should be investigated immediately. (vi) all data documentation prepared should then be passed to the wages supervisor for checking.) (c) The following control procedures should be adopted: (i) (ii) the interviews manager should issue standardised time sheets to all interviewers in advance of work to be undertaken. input documentation and notifications from the interviews manager as appropriate. (v) after completion of the foregoing procedures the master file update reports should be filed securely together with input documentation and written notifications from the interviews manager. (Full marks will be awarded for stating procedures similar to those above. Time sheets should be easily identifiable to individual interviewers. (vi) at random intervals a more senior responsible official of the company (for example the company accountant).ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) 1 (a) December 2004 Answers The objectives of the internal controls that should be exercised over a wages system are to ensure that: (i) (ii) wages are paid only to authorised employees of the company. by the interviews manager.) (b) The following control procedures should be adopted: (i) (ii) employees involved in the actual input and processing of wages data should have ‘read only’ access to the wages master file.blogspot. (v) wages deductions are paid over in full to the appropriate third parties. (iv) all authorised time sheets and pay rates/bonus documents should be forwarded intact to a wages clerk for the calculation of gross wages by the interviewer (employee). there should be formal procedures requiring the interviews manager to provide detailed written notification to a responsible official (for example the wages supervisor) of starters and leavers. (Full marks will be awarded for stating procedures similar to those above. to the wages supervisor for cross checking of report totals. Time sheets should be checked and evidenced as such for authenticity and hours worked. and authorisation prior to passing to another wages clerk for computer input and processing following password access. the wages clerk should prepare the data for input by batching and the calculation of a batch input total. (iv) after updating the wages master file. Interviewers should be pursued for time sheets not submitted.) 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (iii) pay rates applicable for hours worked and bonus payments due should be either noted on the time sheets by the interviews manager or noted on separate documentation as appropriate. for the attention of the wages clerk (below). (v) having calculated gross wages. (Full marks will be awarded for identifying FOUR of the above or other appropriate objectives. the responsible official should request a master file update report. the amended details agree with the written notifications from the interviews manager. The written notification received from the interviews manager should be retained for reference as appropriate (see below). interviewers should submit their time sheets to the interviews manager on a timely basis for monthly processing. a request should be made for the computerised production of the interviewers’ wage slips. Any discrepancies should be noted for re-input. (viii) on satisfactory processing of re-input data and cross checking to a further ‘current period payment details’ report as required. the number of authorised employees on file agrees with the independent record maintained. the input documentation should then be passed together with the computer produced ‘current period payment details’ report. (iii) wages are paid only at authorised rates of pay. should access the wages master file and check its contents to the manual records maintained. (vi) wages transactions are recorded completely and accurately in the accounting records. (iv) wages deductions are properly accounted for. and check that: – – – the report number is in line with expectations. wages are paid only in respect of work carried out or other authorised criteria. (iii) the responsible official (above) should maintain an independent record of the cumulative number of authorised employees on file and after preparing appropriate input documentation should update this record to show the revised number of authorised employees that should exist on the master file. using a hash total represented by the total gross wages due.com . (vii) on completion of processing. would lead to audit concern as to the possibility of unrecorded sales and the incorrect categorisation of sales in the company’s accounting records. He would also need to ensure that such a relationship was commercially viable from the firm’s perspective.2 (a) The audit engagement partner (audit partner) should consider the following general matters: (i) the reason why the directors of Wizzin wish to appoint new auditors to the company. The directors appear not to be unduly concerned about the company’s trading position. Given the nature. There would therefore be concern as to the completeness and accuracy of recording of transactions in the company’s accounting records and the reflection of the same in the financial statements. then legislation founded in order to maintain auditor independence may prohibit the firm from acting as auditors to it. Owing to the portability of inventory lines and open access to them. in addition to those employed at its head office. the audit partner would need to carefully consider whether the firm could properly service this particular audit assignment. (ii) (iii) The company has incurred substantial costs on repair and refurbishment programmes at all 14 sites around the country. The assessment of inherent risk would need to take into account these factors. in isolation. As well as the issue of existence. The nature of the company’s operation appears to be quite complex. This would lead to concerns over the completeness and accuracy of recording in this area and the potential of unauthorised payments of salaries and wages. resulting in a breakdown of the working relationship with them. Consequently he would need to consider the integrity and working practices of Wizzin’s directors together with the financial strength of the company. Sales are predominantly for cash.) 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. size and spread of locations of Wizzin’s activities. including the range of tools and equipment available for hire.) (b) The following factors would affect the assessment of the inherent risks associated with the audit of the financial statements of Wizzin: (i) The company is operating in a competitive market place. (ii) (iii) the ability of the firm to carry out an efficient audit. there may be particular concern as to the measurement of stockpiles of sand and gravel and concerns about valuation may be founded primarily on the values ascribed to inventory lines and individual items of inventory held at each site. (vi) The company’s tangible non-current assets include a large volume of high value mobile items. (Full marks will be awarded for stating and commenting on FIVE of the above or other relevant factors that would affect the initial assessment of inherent risk. which is particularly susceptible to loss or misappropriation and this together with the ‘collect or delivery’ flexibility given to credit sale customers increases the likelihood of unrecorded sales. with large volumes of purchases. As regards quantification. The audit partner would need confidence that the firm could build a successful audit/client working relationship with the company. However they may be predisposed to misstating the financial statements in order to present a more favourable trading and balance sheet position and to instil greater third party confidence in the company. Given the likelihood of starters and leavers throughout the year and other payroll complexities including the possibility of overtime and bonus payments. the company will have a large volume of payroll transactions. increase the possibility of material misstatement in the company’s financial statements. (Full marks will be awarded for describing THREE of the above or other relevant matters. Similarly if any of the firm’s partners are connected to Wizzin in any way.com . If it is because they have refused to respond positively to a reasonable request from the existing auditors. ACCA’s Rules of Professional Conduct provide detailed guidance notes on this issue. These costs would have a material effect on the company’s financial statements and initial concerns would centre around the completeness and accuracy of recording. any risk of breaching the independence of the firm. This will be determined by the reporting deadline set by the company and the audit resources available to the firm. (iv) general commercial considerations. Concerns would centre around the basis of the quantification and valuation of inventories for inclusion in the company’s balance sheet. together with the possibilities of potential going concern problems being encountered by the company. There may be a risk of a threat to the independence or perceived independence of the firm if it is considered that it would become unduly dependent on Wizzin as a consequence of the size of the fee charged to it. The geographical spread of the company’s activities over 14 sites would. the valuation of individual assets may cause concern given the possibility of damage and shortened assets’ lives brought about as a consequence of the relatively harsh operating environment of the company. (iv) The company has extensive retail operations selling a wide range of products. Any mobile or transportable assets owned by a company are susceptible to loss or misappropriation. (v) Inventories would represent a significant proportion of the company’s assets and there would be initial concern over this area of the company’s financial statements.blogspot. This would cause initial audit concern and would render this area of the company’s financial statements being allocated a high inherent risk factor. The availability of staff with sufficient technical knowledge and expertise may be dependent on other audit assignments to which the firm is already committed. then the audit partner of your firm may not be interested in quoting for the appointment. The nature and mix of sales at each site including the hiring of tools and equipment. has suffered declining profits and has substantial bank borrowings. (vii) The company employs 252 (14 x 18) full-time shop and yard staff supplemented with part-time and temporary employees. but this characteristic is particularly applicable to the non-current assets stated as owned by the company. sales and accounting transactions generally. there would also be concern as to the likelihood of loss or misappropration of inventories. including the correct categorisation of costs between revenue (repair) and capital (improvement) expenditure in the financial statements. notwithstanding the auditor’s past experience about the honesty and integrity of management and those charged with governance. Example – checking the depreciation calculations as applied to non-current assets to ensure that depreciation rates are in accordance with the stated policy of the entity. (ii) Example – checking the accuracy of extensions of balance sheet inventory calculations to verify the accuracy of the valuation of reported inventories. (ii) Example – the observation of the counting of inventories by an entity’s personnel to ensure that they are counted in accordance with procedures authorised by the management of the entity. relevant professional bodies. particularly when carried out by senior managers of a company. the degree of concealment and the level of the resultant misstatement in the financial statements. in accordance with an identified reporting framework. (b) 4 (a) (i) The objectives and scope of the work of an internal auditor may vary widely and depend on the size and structure of the company and requirements of its management. (Full marks may be awarded for answers including only some of the above or other relevant points. it is often accepted that fraud may not be easy to detect. (1) Inspection (i) Consists of examining records. efficiency and effectiveness of operations. the effectiveness of credit control and the possibility of under/over statement of reported sales. documents or tangible assets. The auditor must maintain an attitude of professional scepticism throughout the audit. (ii) Example – the physical inspection of a freehold office building to verify existence of the building. Audit evidence comprises source documents and accounting records underlying the financial statements (subject to audit) and corroborating information from other sources. Consequently the extent to which an external auditor should be expected to detect fraudulent activity is dependent on the scale. (2) Observation (i) Consists of looking at a process or procedure performed by others. Review of the economy. The objective of the work of an external auditor. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.) (b) External auditors should consider whether: (i) the work has been performed by persons having adequate technical training and proficiency as internal auditors and the work of assistants has been properly supervised.) (ii) The extent to which an internal auditor should be expected to detect fraud will vary dependent on the tasks he is asked to carry out by management. (3) Recalculation (i) Consists of checking the mathematical accuracy of documents or records. Ordinarily. The scope of the work required to meet these objectives is determined by the auditor having regard to any terms of the audit engagement and reporting requirements together with the requirements of International Standards on Auditing. since it is ordinarily accompanied by acts specifically designed to conceal its existence. Example – the observation of the opening of the mail of an entity to ensure that at least two employees are present to receive and witness the receipt of monies received by the entity.com . regulations and other external requirements and with management policies and directives and other internal requirements. (Full marks may be awarded for answers including only some of the above or other relevant points. employed to audit the financial statements of a limited liability company.blogspot. the scale of any fraudulent activity and the resources with which he is provided to detect fraud. is to enable the auditors to express an opinion as to whether the financial statements are prepared in all material respects.3 (a) The term ‘audit evidence’ describes the information obtained by the auditors in arriving at the conclusions on which the audit opinion is based. reviewed and documented. legislation and regulations. Example – the calculation of an entity’s trade receivables ratio to help assess the reasonableness of bad debt provisions. (4) Analytical Procedures (i) Consists of evaluations of financial information made by plausible relationships among both financial and nonfinancial data. internal auditing activities include one or more of the following: – – – – Review of the accounting and internal control systems. Review of compliance with laws. (ii) Example – the calculation of the average remuneration (total wages and salaries divided by total employees) paid to the employees of an entity. Examination of financial and operating information. However. An external auditor should design audit procedures to obtain reasonable assurance that misstatement arising from fraud that is material to a company’s financial statements will be detected. to assess the reasonableness of the reported wages and salaries costs as compared to a previous equivalent period. Example – the examination of a purchase invoice to vouch the validity of an entry in the trade payables ledger. It presupposes intellectual honesty. members should strive for objectivity in all professional and business judgements. business and personal financial relationships.blogspot. Objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other. (iii) members should not accept or perform work which they are not competent to undertake unless they obtain such advice and assistance as will enable them competently to carry out the work.) 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (Full marks will be awarded for stating any FOUR of the above principles. (c) The fundamental principles of the ACCA’s Code of ethics are: (i) (ii) members should behave with integrity in all professional. diligence and expedition and with proper regard for the technical and professional standards expected of them as members. (iii) conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the work performed. (v) members should behave with courtesy and consideration towards all with whom they come into contact during the course of performing their work. (iv) any exceptions or unusual matters disclosed as a consequence of the work have been properly resolved.com . Integrity implies not merely honesty but fair dealing and truthfulness. (iv) members should carry out their professional work with due skill.(ii) sufficient appropriate audit evidence has been obtained to afford a reasonable basis for the conclusion reached. care. Generally up to 11/2 marks for each stated procedure up to a maximum of (6 x 11/2) (c) Stating the internal control procedures that the company should adopt over the completion. so if a candidate concentrates on a few points then they should not be given as much recognition. Generally up to 11/2 marks for each stated procedure up to a maximum of (8 x 11/2) (12 marks) (Total 25 marks) (9 marks) (4 marks) 2 Wizzin (a) Describing general matters the audit engagement partner should consider in deciding whether to quote for the audit appointment. After marking each question. The majority of the questions require several points to be included within the answer. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. 1 Opiniol (a) Stating objectives of the internal controls exercised over a wages system. Generally up to 1 mark per point up to a maximum of 3 marks for each matter with an overall maximum of (3 x 3) (b) Stating with reasons factors that would affect the initial assessment of inherent risks associated with the audit of the financial statements.com . for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade.blogspot. However.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) December 2004 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. Generally 1 mark per objective up to a maximum of (b) Stating the internal control procedures that the company should adopt over the updating of its wages master file with regards to starters and leavers. consideration should be given to the depth and relevance of points provided by each candidate when answering the question. and the marks adjusted to ensure that the total awarded is fair. and their overall mark should be lower than a candidate who provides a range of points. authorisation and computer processing of interviewers’ time sheets. the candidate should be given full credit for such points. Generally up to 1 mark for each point with a maximum of 4 marks for each factor with an overall maximum of (16 marks) (Total 25 marks) (9 marks) 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. if it is below a pass standard then it should be awarded less than 40%. If the answer is of a pass standard then it should be awarded a minimum of 40%. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. the total mark awarded should be evaluated to assess whether it is fair. In conclusion. Generally 1 mark per point up to a maximum of (ii) Commenting on the extent to which each should be expected to detect fraud. Generally up to 1 mark for each explanation up to a maximum of (4 x 2) (8 marks) (Total 25 marks) (8 marks) (11/2 (11/2 (11/2 (11/2 marks) marks) marks) marks) (11/2 marks) (11/2 marks) (b) 4 Internal Auditors and External (Registered) Auditors (a) (i) Contrasting the objectives and scope of the work of internal auditors and external (registered) auditors.3 Audit Evidence (a) Explanation of the term ‘audit evidence’ Statement of what it comprises (i) Explaining what the following procedures involve: Inspection Observation Recalculation Analytical Procedures (ii) Providing TWO examples of the use of each of the procedures. Generally up to 2 marks for each principle stated up to a maximum of (4 x 2) (8 marks) (Total 25 marks) (8 marks) (4 marks) (5 marks) 12 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Generally up to 1 mark for each example up to a maximum of (4 x 2) Explanation of the purpose of the procedure stated in each example. Generally 1 mark per point up to a maximum of (b) Explanation of the matters that the external auditor should consider when evaluating and testing work carried out by internal auditors.blogspot. Generally up to 1 mark per point pertaining to each matter up to a maximum of (4 x 2) (c) Stating the fundamental principles of ACCA’s Code of ethics.com . com Paper T8(INT) .Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 13 JUNE 2005 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. blogspot. most of whom are provided with an executive type of company car. Required: (a) State FOUR objectives of the internal controls that should be exercised over non-current assets. To protect the company from receiving only low bids from employees. (10 marks) (d) With regard to the delivery of office furniture to Recruitment Co on 31 March 2005: (i) State how Recruitment Co should have reflected the transaction in its accounting records. The directors of the company have developed a strong control environment in the company and have introduced effective internal controls. This included $30. sealed bids are also received from independent motor car dealers. It is company policy to purchase only new cars and to replace them when they are two years old. During the year ended 31 March 2005 the company purchased large quantities of office furniture.ALL FOUR questions are compulsory and MUST be attempted 1 Recruitment Co is a limited liability company which operates as a prestigious.com . may be used by the company to facilitate control over non-current assets. executive recruitment agency. These include the review of monthly management accounts at formal monthly board meetings and the use of a non-current assets register. The company’s accounting records show that the furniture was delivered on 31 March 2005 and that the associated supplier invoice was received on 31 May 2005. (3 marks) (ii) Suggest FIVE internal controls that Recruitment Co should employ over the disposal of cars. (2 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. as part of an ongoing expansion programme. The company has 36 employees. some two weeks after the company’s financial statements were presented for audit. and they do so by forwarding sealed bids to the company as and when replaced cars become available. (4 marks) (c) (i) Explain why it is particularly important that there should be strong internal controls over the disposal of cars by Recruitment Co. if properly maintained.000 of furniture which was ordered on 18 February 2005 but in respect of which the company had not been invoiced by 31 March 2005. (4 marks) (b) Explain how Recruitment Co’s non-current assets register. Employees are allowed to purchase replaced cars. Its most recent financial statements are those for the year ended 31 March 2005. (2 marks) (ii) Briefly describe TWO procedures the company’s auditors should carry out to verify that the delivery occurred on that date. These were purchased in July 2004 in anticipation of a high demand. beauty and perfumery products. your firm will be responsible for the accuracy of the reported inventories figure.’ (2) ‘Most of the company’s inventories are stored in sealed cardboard boxes. However.2 Sweet Scents Co is a wholesale supplier of cosmetic.com [P. (3) and (4) made by the financial director to the auditors of Sweet Scents Co: (i) Identify and explain the concerns the auditors should have with regard to the accuracy of the inventories figure to be reported in the company’s financial statements for the year ending 30 June 2005. which are labelled with product descriptions. because employees of your firm will be in attendance at the count and will check inventory values. quantities and use by dates. identifies quantities of inventories held by product number and description. as delivered to the company.’ (3) ‘On 31 May 2005 a flood at the warehouse caused varying degrees of damage to some of the inventories. In discussions with the auditors about their forthcoming audit of the company’s financial statements for the year ending 30 June 2005. updated from goods received notes and goods despatched notes.) (15 marks) (c) Describe the procedures the auditors of Sweet Scents Co should carry out on goods despatched notes and sales invoices to test sales cut-off at the year end date. . (Note: parts (i) and (ii) above carry equal marks. We are resigned to the fact that these products are worthless but we’ll wait until the next financial year before we throw them out and write them off. but due to a public health scare we haven’t sold any. (5 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The company’s inventories are stored in a central warehouse and a computerised system. Sweet Scents Co’s financial director made the following statements: (1) ‘Our employees will carry out a thorough count and valuation of all inventories as at 30 June 2005. The damaged inventories were not covered by insurance but as we will be valuing them at cost they will not be separately identified at the inventory count on 30 June 2005.’ Required: (a) Comment on the validity of statement (1) of the financial director as to the audit firm’s responsibility for the accuracy of the inventories figure at 30 June 2005. This will make inventories easy to identify and easy to count.blogspot.’ (4) ‘Approximately five per cent of the value of our inventories is represented by Fleurs Bleu perfumery products. Inventories are counted only at the company’s year end date. (5 marks) (b) With reference to each of the statements (2). and (ii) State the action the company should take both at the inventory count and in the valuation process to overcome these concerns.T.O. Required: (a) Detail the work that the audit team should have carried out in March 2005.com . (5 marks) (c) For each of the sources of audit evidence identified below. (iii) Written confirmation from third parties. (9 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. in preparation for the final audit of Jip Co’s financial statements for the year ending 31 July 2005. (i) Events after the balance sheet date. (8 marks) (b) State FIVE matters that should be discussed at the audit briefing meeting as part of the planning process of the final audit of Jip Co’s financial statements for the year ending 31 July 2005. (12 marks) (c) State SIX audit procedures to obtain evidence that the going concern assumption is appropriate for an entity. Required: (a) Explain the underlying assumption applying to an entity when its financial statements are prepared on a going concern basis. (ii) Satisfactory internal control procedures. Attendees at the workshop will discuss the auditor’s responsibilities in the audit of financial statements regarding the appropriateness of the going concern assumption as a basis for the preparation of the financial statements. together with other team members. provide FOUR practical examples of how members of your audit team may use such evidence to support their audit conclusions in respect of the final audit of Jip Co’s financial statements for the year ending 31 July 2005.blogspot. As part of the final audit team you. have been instructed to attend a briefing meeting as part of the planning of the final audit of Jip Co’s year end financial statements. a limited liability manufacturing company is an established audit client of your firm. (12 marks) (25 marks) 4 Your firm has selected you to attend a discussion workshop as part of your audit training programme. (4 marks) (b) State EIGHT financial indicators and FOUR operating or other indicators of risk that the continuance of an entity as a going concern may be questionable. In March 2005 an audit team from your firm visited Jip Co to review the company’s internal control system in preparation for the final audit of the company’s financial statements for the year ending 31 July 2005.3 Jip Co. Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com . blogspot.FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . subsequent contact with the successful bidder and authority to dispose of the relevant car.) (b) Recruitment Co’s non-current asset register should provide an up to date inventory of all non-current assets owned by the company.com . (Full marks may be awarded to answers which include only some of the points referred to above. who is independent from the acquisition custodian. (vii) are disposed of only when authorised.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2005 Answers 1 (a) The objectives of the internal controls that should be exercised over a non-current assets system are to ensure that non-current assets: (i) are acquired only when necessary. (v) are protected from loss and damage. and should be subject to verification by an appropriate company official. it is important that existence and condition checks are regularly carried out on the non-current assets of the company. safe custody and replacement of assets. This. combined with the value of each ‘executive type’ vehicle increases the risk of loss to the company in this area. it is important that any discrepancies and damage noted when checking are brought to management’s attention and promptly resolved. by the authority of the responsible official. However. when cars are two years old.) (c) (i) Given that most of Recruitment Co’s employees are provided with a company car and that each car is replaced biannually. for example. including the non-current assets register. it is probable that there is a significant loss in value over each two year period of ownership as compared to the purchase price. by a responsible individual of the company. Specific information relating to each individual asset as recorded in the register will normally include asset description. depreciation charged and written down value. there is a relatively high frequency of car disposals by the company. Such information above should facilitate the directors of the company in maintaining control over the use. Checks should be made in both directions from the register to assets and from assets to the register. Disposal should be to the highest bidder and all bid documents should be retained for future reference as appropriate. cars should be released to buyers only when the company has received cleared funds in respect of sales. The individual should be independent of the purchasing function and of recording in the company’s accounting records. The format of the register should allow for the groups of assets (e. (Full marks will be awarded for stating any FOUR of the above or other appropriate objectives. office furniture. However. – – 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. motor vehicles. Owing to the nature of each new car purchased. Recruitment should raise fully detailed invoices for the sale of the cars. These tasks should be carried out by personnel who are independent of the purchase and disposal functions. sealed bids should be forwarded to the responsible official for scrutiny. date of acquisition. Similarly. the company’s financial director. governing the company’s policy and procedures to be followed on the disposal of cars. Procedures should encompass appropriate and clear lines of communication in this regard.) (ii) Recruitment Co should exercise the following internal controls over the disposal of cars: – – – – there should be formal written instructions as authorised by the board of directors. disposal and recording functions.blogspot. sealed bids to purchase should be obtained from at least three reputable independent car dealers in addition to bids from interested employees. (iii) are acquired only when authorised. (ii) are acquired on the most economic terms. location. in order to maintain effective control. (Full marks may be awarded to answers which do not contain all of the above points. Invoices should be checked for completeness and accuracy before issue. Given the possible loss to the company as a consequence of non-payment. valuable and desirous and by their nature possibly subject to misuse or misappropriation. some of which will be transportable. (iv) are properly recorded in the accounting records. expected useful life. cost. details of disposals of cars should be promptly and accurately recorded in the company’s accounting records. because vehicles for disposal are likely to be highly desirable to prospective purchasers (both third party and employee) the disposal process should be carefully managed to ensure that losses are minimised. (viii) are disposed of at the best possible price. to be identified by individual asset such that at any point in time reference may be made to individual assets as appropriate. depreciation rate. (vi) are disposed of only when necessary. office equipment) as reflected in the company’s general ledger.g. a responsible official should authorise the disposal of cars in accordance with company policy. as special attention will need to be applied to these inventories in valuing them at the lower of cost and net realisable value. Similarly. Storage of Inventories (i) The auditors should be concerned as to whether the company’s procedures with regard to the counting and valuation of inventories will be sufficiently thorough to ensure that the value of inventories is not materially mis-stated in the company’s financial statements. This should allow for the unpacking of all flood damaged boxes so that the extent of damage to individual items can be accurately assessed in order to subsequently attribute appropriate values to them for reporting in the company’s financial statements. and at present the directors of the company would appear to be unaware or be ignoring the impact that the damage will have on the value of inventory to be reported in the company’s financial statements. (b) 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.– the board of directors of the company should monitor the profits/losses arising on the disposal of cars as reported in the monthly management accounts to assess the appropriateness of the company’s depreciation policy and to oversee the effectiveness of the company’s disposal procedures. To verify the date of delivery the auditors should: – – – – confirm the date of receipt recorded on the supplier’s delivery note. counters who should be independent of the inventory and warehouse functions should be alerted to the possibility that the contents of the sealed boxes may not be as labelled and therefore contents should be checked at random.000 to non-current assets (office furniture) and made an appropriate accrual of $30. make verbal enquiries to appropriate employees of Recruitment.blogspot.000 in respect of the supplier’s invoice not received at the balance sheet date.) (d) (i) Recruitment Co should have reflected the transaction in its accounting records as an addition (at cost) of $30. boxes on which original seals appear to have been broken) should be opened and the contents checked thoroughly. The fact that inventories are stored in sealed cardboard boxes presents risks to the process of ensuring that inventories are accurately quantified and valued. It is the responsibility of the directors of Sweet Scents Co to prepare the annual financial statements for audit and to ensure that the financial statements show a true and fair view (or are presented fairly. subsequently received. (Full marks will be awarded for suggesting any FIVE of the above indicative controls or other appropriate controls. Much of the company’s inventory (cosmetic. Flood Damaged Inventories (i) The auditors should be concerned that a large proportion of the company’s inventory as at 30 June 2005 has been flood damaged.) 2 (a) The director’s statement is invalid. confirm the date of receipt recorded on goods received documentation issued by Recruitment Co. it is their responsibility to ensure that the amount at which inventories are reported in the financial statements represents inventories. (ii) The inventory count instructions should make full provision for the identification and separation of flood damaged inventory items.com . easily transportable and desirous. Arranging for Sweet Scents Co’s employees to count and value the company’s inventories is only part of the directors’ obligation in meeting their responsibility with regard to the financial statements. the responsibility of the company’s directors in this regard is not reduced. There is therefore a risk that the company inventory valuation could be materially overstated in the financial statements if the issue regarding flood damaged inventories is not fully addressed by the directors. which are physically in existence and are valued in accordance with generally accepted accounting principles and accounting standards. confirm the date of delivery as stated on the supplier’s invoice. Consequently. Whilst the auditors of Sweet Scents Co may attend the physical count and carry out tests to determine the accuracy of the count and subsequent valuation. (ii) (Full marks will be awarded for describing any TWO of the above or other appropriate procedures. – undamaged inventory – at cost. as well as being valuable. Any boxes which arouse suspicion as to their actual contents (for example. – partially damaged inventory – at net realisable value. (ii) It is particularly important that there are sufficiently robust procedures at the company’s inventory count to identify inventories which are near (or past) their sell by date. Consequently there is a high inherent risk of inventory loss due to perishing goods and misappropriation throughout the year. The values to be placed on these items will vary depending on the extent of damage but will possibly be reflected as follows: – perished inventory – at no value. Inventory should be valued at the lower of cost and net realisable value in the company’s financial statements and the water damage caused to some product lines is likely to be such that their net realisable value is significantly lower than cost. in all material respects). for example. beauty and perfumery products) will be of a perishable nature. by seeking detailed explanations as to the reasons for any particularly large losses on disposal. (v) the assignment of audit staff to specific audit areas. sale of inventory after the year end – to verify the value of inventory. They should then select further goods despatched notes for despatches both soon before and soon after the year end date. to determine the extent to which records in these areas could be relied upon. (ii) 3 (a) At the audit visit in March 2005. (ii) To overcome the auditors’ concerns. (ii) areas of the audit which appear to have a high audit risk. (iv) the audit programme to be used. the company should ensure that all inventory items represented by Fleurs Bleu perfumery products are separated and clearly identified at the forthcoming inventory count.) (c) (i) Events after the balance sheet date – – – – cash received after the year end – to verify the value of a debt. If they have. such a valuation would appear to represent a material overstatement of reported inventory values (and profit) in the company’s financial statements. the company’s management should ascertain whether in fact they have any sale value at all. for example new systems. (vii) Any special circumstances applying to working methods when carrying out the audit work at Jip Co’s premises. The auditors should also carry out similar tests on sales invoices raised on and around the year end date by checking from sales invoice entries back to goods despatched notes. The auditors would be concerned to ensure that sales were not overstated due to the fact that goods despatched after the year end had been included as sales for the prior period. (ii) evaluated the adequacy of the systems to meet control objectives. (b) The following matters should be discussed at the audit briefing meeting: (i) findings from the audit visit in March. inventory. If the inventory items are worthless then they should be given a nil value in the valuation process. the firm’s standard programme. (Full marks will be awarded for identifying any FIVE of the above or other matters.com . (iii) carried out tests of control to determine whether controls identified in the systems evaluation process had been operated effectively throughout the accounting year to the date of the audit visit. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (iii) the audit approach to be adopted. for example. Given the relative material value of these items it is particularly important that this aspect of the inventory count is well supervised. (iv) designed and carried out tests in areas where controls were weak. (v) formed a judgement as to the extent that the company’s systems of internal control. invoices received after the year end – to verify the value of an accrual. to the date of the audit visit. could be relied upon as a basis for reducing the level of detailed testing at the final audit stage. or a modified or specific programme. Standard accounting treatment dictates that inventories should be valued at the lower of cost and net realisable value – consequently worthless inventories should be reported as having a nil value in the financial statements for the year ending 30 June 2005. as compared to the previous year. (vi) the timing of the audit work. Having identified the Fleurs Bleu inventory items. payment of an insurance premium after the year end – to verify the existence of a non-current asset. Given that approximately five per cent of the company’s inventory value would be represented by the Fleurs Bleu perfumery products if included at cost. before the recording on inventory count sheets. for example. and conversely that goods despatched up to and including those on 30 June 2005 were not omitted from reported sales. (c) To check sales cut off: (i) When attending the warehouse for the inventory count on 30 June 2005 the auditors should select a sample of goods despatched notes for despatches made on that day. audit staff should have: (i) ascertained the company’s systems of internal control recording any changes. including the deadline date for the provision of audited financial statements. areas of weakness. and this value is lower than cost then they should be valued at net realisable value. in the company’s permanent audit file.blogspot.Worthless Inventories (i) The auditors should be concerned that the directors’ intentions to value worthless inventories at cost do not follow the standard accounting treatment that should be adopted in the preparation of the company’s financial statements. (ii) The sample of goods despatched notes should be traced to the associated sales invoices to ensure that sales invoices have been posted as sales in the correct accounting period. a bank certificate confirming the terms of charges held against the company’s assets – to verify the existence of charges held against company assets. assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. or principal supplier. non-compliance with capital or other statutory requirements. Accordingly. inability to comply with the terms of loan agreements. Operating or other indicators of risk that the continuance of an entity as a going concern may be questionable include: – – – – – – loss of key management without replacement. twelve months from the balance sheet date. authorisation of purchase invoices – to verify the value of purchases. (Full marks will be awarded for stating EIGHT financial and FOUR operating or other indicators of risk. substantial operating losses or significant deterioration in the value of assets used to generate cash flows. (Full marks will be awarded for answers containing points similar to the above. inability to obtain financing for essential new product development or other essential investments. a certificate from a specialist. changes in legislation or government policy expected to adversely affect the entity. letter from a loan company. adverse key financial ratios. indications of withdrawal of financial support by debtors and other creditors. an entity is ordinarily viewed as continuing in business for the ‘foreseeable future’ with neither the intention nor the necessity of liquidation. strong system of perpetual inventory controls – to verify the value of inventories.(ii) Satisfactory internal control procedures – – – – regular reconciliation of the trade payables ledger – to verify the value of trade payables. cessation of trading or seeking protection from creditors pursuant to laws or regulations. but is not limited to. The term ‘foreseeable future’ refers to a period which should be at least. result in claims that are unlikely to be satisfied. (Full marks will be awarded for providing examples as above or any other appropriate examples. arrears or discontinuance of dividends.) 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. negative operating cash flows indicated by historical or prospective financial statements. confirming the value of specific inventories held – to verify the valuation of inventories. if successful. franchise.) 4 (a) Under the going concern assumption. inability to pay creditors on due dates. – – – – – – – – – – where there are fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment. labour difficulties or shortages of important supplies. issue of sequentially controlled goods despatched notes – to verify the completeness of sales. pending legal or regulatory proceedings against the entity that may. change from credit to cash-on-delivery transaction with suppliers.blogspot.) (b) Financial indicators of risk that the continuance of an entity as a going concern may be questionable include: – where there is a net liability or net current liability position. or excessive reliance on short-term borrowings to finance long-term assets.com . licence. confirming the balance outstanding on a loan – to verify the loan liability of the company. (iii) Written confirmation from third parties – – – – direct confirmation of a trade receivables balance – to verify the existence of a trade receivables balance. loss of a major market. reviewing events after the period end to identify those that either mitigate against or otherwise affect the entity’s ability to continue as a going concern.(c) Procedures that auditors may carry out to obtain evidence as to the appropriateness of the going concern assumption for an entity include: – – – – – – – – analysing and discussing cash flow. inquiring of the entity’s lawyer regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications.com . reviewing the terms of debentures and loan agreements and determining whether any have been breached.) 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. considering the entity’s plans to deal with unfulfilled customer orders. reading minutes of the meetings of shareholders. legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds. confirming the existence. profit and other relevant forecasts with management.blogspot. (Full marks will be awarded for stating SIX audit procedures that auditors may carry out. the board of directors and important committees for reference to financing difficulties. analysing and discussing the entity’s latest available interim financial statements. FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com .blogspot. After marking each question. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Generally up to 1 mark for each point. Generally up to 1 mark for each accounting entry up to a maximum of (ii) Description of audit procedures to verify delivery date of office furniture. Generally 1 mark per point up to a maximum of (ii) Suggesting internal controls that Recruitment Co should employ over the disposal of cars. and their overall mark should be lower than a candidate who provides a range of points. Conclusion that the statement is invalid Reasoning of conclusion. the total mark awarded should be evaluated to assess whether it is fair. Generally 1 mark per point up to a maximum of (b) (i) (ii) (4 marks) (1 mark) (2 marks) (3 marks) (4 marks) (4 marks) Identification of audit concerns with regard to the accuracy of the inventories figure to be reported in the company’s financial statements. In conclusion. Generally 1 mark per objective up to a maximum of (b) Explanation of how the company’s non-current assets register may be used as a means of facilitating control. consideration should be given to the depth and relevance of points provided by each candidate when answering the question. Stating action the company should take to overcome concerns. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade. so if a candidate concentrates on a few points then they should not be given as much recognition. if it is below a pass standard then it should be awarded less than 40%. Generally 1 mark per point up to a maximum of 2 marks for each control with an overall maximum of (2 x 5) (10 marks) (d) (i) Stating correct accounting treatment of purchase of office furniture.blogspot.com . with a maximum of 3 marks for (i) and 3 marks for (ii) applied to each statement with an overall maximum for the whole section of (15 marks) (c) Description of audit procedures to be carried out on goods despatched notes and sales invoices to test sales cut-off at the year end date. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. The majority of the questions require several points to be included within the answer. Generally up to 1 mark for each procedure up to a maximum of (2 marks) Total (25 marks) Sweet Scents Co 2 (a) Commentary on validity of financial director’s statement. Recruitment Co 1 (a) Stating objectives of the internal controls exercised over non-current assets. for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. Generally 1 mark per point up to a maximum of (c) (i) Explanation of why there should be strong internal controls over the disposal of cars by Recruitment Co. Generally 1 mark per point up to a maximum of (5 marks) Total (25 marks) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. However.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2005 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. the candidate should be given full credit for such points. If the answer is of a pass standard then it should be awarded a minimum of 40%. and the marks adjusted to ensure that the total awarded is fair. Generally 1 mark per point up to a maximum of (c) Providing examples of how audit team members may rely on each source of audit evidence. For mention of and clarification of the term ‘foreseeable future’ up to Other points – generally 1 mark per point up to a maximum of (b) Stating indications of risks that the continuance of an entity as a going concern may be questionable. Financial indicators – generally up to 1 mark per point up to maximum of Operating or other indicators – generally up to 1 mark per point up to a maximum of (c) (8 marks) (4 marks) (1 mark) (3 marks) Stating procedures that auditors may carry out to obtain evidence that the going concern assumption is appropriate for an entity. briefing meeting. Generally 1 mark per point up to a maximum of 2 marks for each procedure – with an overall maximum of (9 marks) Total (25 marks) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. Generally 1 mark per point up to a maximum of 2 marks for each procedure detailed up to a maximum of (b) Stating matters that should be discussed at final audit planning.Jip Co 3 (a) Detailing work that the audit team should have carried out in March 2005.com . Generally up to 1 mark for each example provided with a maximum of 4 marks for each type of evidence up to a maximum of (4 x 3) (12 marks) Total (25 marks) (5 marks) (8 marks) Going Concern Workshop 4 (a) Explanation of the underlying assumption applying to an entity when its financial statements are prepared on a going concern basis. Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 12 DECEMBER 2005 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Paper T8(INT) . 4. It commenced trading in 2001 and now has 60 employees with separate sales and accounts departments. a copy of each invoice is forwarded to the assistant accountant who is responsible for dealing with customers’ invoice queries. Slow or late paying customers are pursued for payment by Jon May. (ii) Describe the implication of each weakness identified. 3. However at a recent board meeting. are directed to a sales clerk. the issue of sales credit notes. as he deems appropriate. (5 marks) (b) State FOUR objectives of the internal control which should be exercised over a sales and trade receivables system. The following policies and procedures form part of the control activities exercised over that system. Requests from potential customers to open a credit account are forwarded to Jon May. When credit facilities are granted a sales clerk updates the sales ledger master file with the new customer details. Jon May. Haydn Co uses a networked integrated sales and general ledger accounts system. The programme prices sales invoices automatically using authorised prices stored in a standing data file. Required: From the information provided on the sales and trade receivables system of Haydn Co: (i) Identify FOUR weaknesses in the system. the sales director is an excellent salesman and has been largely responsible for the company’s growth since 2001 and for the implementation of the control activities exercised over the company’s sales and trade receivables system. The company’s accountant and assistant accountant. and the posting of credit notes to the trade receivables ledger. 2.blogspot. On a daily basis: – – all invoices are mailed by the sales clerks to customers and the goods despatch notes are forwarded to the stores department to accompany goods as and when despatched. (4 marks) (c) Haydn Co is a limited liability company and wholesale supplier of stationery products. After establishing that a trade receivables ledger account exists.com . Full access to this file is restricted to Jon May and the sales clerks. together with Jon May and the trade receivables department clerks (sales clerks) have full access to all sales ledger files including the master file. (iii) Recommend improvements to address the weakness. (16 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Customer orders received.ALL FOUR questions are compulsory and MUST be attempted 1 (a) State the FIVE components of internal control set out in ISA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement. the clerk uses a sales invoicing programme to generate a prenumbered sales invoice and accompanying goods despatch note addressed to customers for products as ordered. Credit limits are not applied to customer accounts as Jon May considers this to be a restricting factor in achieving sales targets. including those relating to sales and trade receivables. concern was expressed at some aspects of the company’s internal control. in writing or by telephone. who carries out full credit checks before deciding whether to grant a credit facility. Sales clerks post invoices as prepared to Haydn Co’s trade receivables ledger. You should assume that there is an adequate number of employees to implement any recommendations you make. and the automated accounting system immediately updates the company’s general ledger with the trade receivables ledger postings. 1. Required: State the FIVE generalisations about the reliability of audit evidence.O. 3. (14 marks) (b) Briefly explain the purpose of audit working papers and comment on the matters to be considered generally.2 You have been assigned to your firm’s audit of the financial statements of Brahms Co for the year ending 31 December 2005. 4. attended by all members of the audit team. 2. Completeness.T. Required: (a) Explain what is meant by the term ‘a risk-based approach’ to an audit. state the implicit or explicit management assertions made about classes of transactions and events for the period under audit. The standard then states five generalisations about the reliability of audit evidence which may be useful. Classification. . control risk and detection risk. Accuracy. 5. You are required to describe only SIX procedures in total and should set out your answer in the following format: Area of Financial Statements Procedure to verify completeness (9 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. in assessing the extent of working papers to be prepared. Cut-off. At the planning meeting.com [P.blogspot. The manager also explained the importance of preparing good audit working papers and confirmed that he expected the header of every working paper to be properly completed. (6 marks) (c) Describe SIX typical substantive procedures the auditor of the financial statements of a manufacturing company may carry out to verify the completeness of different classes of transactions and account balances. (7 marks) (c) List the information that should be included on the header of every working paper prepared in connection with the audit of the financial statements of Brahms Co for the year ending 31 December 2005. and for the benefit of the junior members of the team he explained the use of the audit risk model comprising inherent risk. (10 marks) (b) ISA 500 (Revised) explains that the auditor should use management assertions to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. (4 marks) (25 marks) 3 (a) ISA 500 (Revised) Audit Evidence states that the reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Occurrence. the audit manager confirmed that the firm would adopt a risk-based approach to the audit. Assertions about different classes of transactions and events for a period under audit are categorised as follows: 1. Your answer should include commentary on the audit risk model. Required: For FOUR of the above categories. where an auditor may need to obtain audit evidence in the form of reports. with reasons. and (ii) For each situation identified (above). (b) Explain what is meant by the term ‘materiality’. FOUR personal qualities which a qualified external auditor should possess. (d) (i) (6 marks) Identify FOUR matters reflected in the financial statements of a limited company where management typically make accounting estimates. (4 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. Required: In response to enquiries from students: (a) State.4 A university recently held a recruitment fair on its campus and invited local firms of auditors to attend. opinions. to interview students for audit junior positions.com . (6 marks) and (ii) Outline the approaches that an auditor should adopt in the audit of an accounting estimate. provide a practical example. students made several enquiries on audit matters. In conversation with you. (c) (i) (6 marks) (3 marks) Identify FOUR different situations during the course of an audit. valuations or statements from an expert. As an existing audit junior at your firm. you attended the recruitment fair to promote your firm and to talk informally to students. Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com . FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com .blogspot. He is also in a position to enter into fraudulent arrangements with customers. Implication The sales director has a vested interest in granting new credit facilities in order to achieve sales targets. The objectives of the internal control which should be exercised over a sales and trade receivables system are to ensure that: – – – – – – – – – bad debts are minimised. (v) (b) Monitoring of controls. Customer accounts should be closely monitored by an independent credit controller to ensure that credit limits are not exceeded. (c) (i) 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Recommendations The responsibilities for the authorisation. (iv) Control activities.blogspot. As a consequence Haydn Co is exposed to the increased possibility of losses arising from bad debts and fraudulent transactions.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) December 2005 Answers 1 (a) The FIVE components of internal control of an entity are: (i) (ii) The control environment. (iii) The information system. administering and recording of sales transactions in the company’s accounting records should be allocated to separate individuals. (ii) Weakness The sales director is responsible for granting credit facilities to new customers. based on a customer’s financial strength and ability to pay. Sales staff should have ‘read’ access only to trade receivables ledger files. including the related business processes relevant to financial reporting and communication. Implication There is a strong possibility that Haydn Co will incur bad debts if appropriate credit limits are not applied to customer accounts and strictly adhered to.com . Implication As sales department staff are responsible for the authorisation and administration of sales transactions and for recording transaction details in the company’s accounting records. (iii) Weakness Credit limits are not applied to customer accounts. Recommendations A maximum credit limit should be applied to each customer account. Recommendations The responsibility to grant new credit facilities to customers should be vested in a responsible official of the company. segregated from the sales department and recording of transactions in the accounting records. bona fide orders received from customers are executed promptly all goods dispatched or services provided are properly invoiced all goods dispatched or services provided are promptly invoiced all debts due are collected in accordance with credit terms credits are made to customer accounts only when properly due sales invoice and sales credit documentation are promptly and correctly recorded in the books of account the books of account accurately reflect sales and trade receivables information Weakness The sales director and the sales clerks have full (amend) access to all trade receivables ledger files. there is a high risk of fraud and error arising on the sales and trade receivables area. only bona fide orders received from customers are executed. The entity’s risk assessment process. Recording of sales transactions in the company’s accounting records should be carried out only by appropriately experienced accounts department staff. Implication Sales invoices could be forwarded to customers in the absence of goods being despatched to them. through the issue of terms and conditions of trading. Any doubts as to the authenticity of written orders received from customers should be removed before execution of those orders. prices charged for the company’s products. Dependent on customers’ own internal controls. either fraudulently or erroneously. Strict controls should be exercised over the updating of this information and it should be regularly monitored to ensure that prices on file equate to those on Haydn Co’s authorised price list. (vi) Weakness Sales clerks have full (amend) access to product price data contained in the standing data file of the sales invoicing programme. Additionally the director may be exposed to beneficial offers from customers. the company’s exposure to fraud and error is increased as a consequence of the assistant accounting having the discretion to raise credit notes whilst also having authority to post into the company’s accounting records. who should have no involvement in the receipt of monies from customers. In addition. In such instances Haydn Co would be erroneously recognising the revenue from the sales transaction in its accounting records whilst also incorrectly recognising a trade receivable. Implication As sales department staff deal with the preparation and processing of sales invoices. Recommendations Access to the standing data file containing product price data should be restricted to the sales director and other appropriate senior responsible officials of the company. The stores department should generate pre-numbered goods despatch notes to accompany all goods despatched and copies should be retained for control purposes.com . Recommendations Current procedures with regard to the production of sales invoices and goods despatch notes should be modified. Implication Haydn Co’s exposure to cash flow difficulties and bad debts could be increased. Procedures for ordering from Haydn Co should be made clear to all customers. Sales invoices should be prepared and forwarded to customers only after the stores department have confirmed to the sales department that goods have been despatched. 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. it is likely that the assistant accountant will not have the knowledge to deal effectively with customer queries. Recommendations Haydn Co should only accept written orders from bona fide customers. made to him in his personal capacity. processing and recording of sales transactions. by for example forwarding a copy of the pre-numbered despatch note. Copy invoices should then be forwarded to the accounts department for posting to the accounting records by appropriately experienced employees. This is because the director may have a pre-disposition not to place undue pressure on late paying customers for fear of their withdawing custom with regard to future stationery purchases.(iv) Weakness The sales director is responsible for pursuing late paying customers. it is likely that relationships may become strained if customers constantly receive invoices in advance of the receipt of goods ordered.blogspot. and these should be strictly adhered to by Haydn Co. (vii) Weakness Sales invoices are raised and forwarded to customers prior to the receipt of confirmation that goods have been despatched to customers. to allow advantageous payment terms on specific customer accounts. Recommendations The responsibility for credit control should be vested in a responsible official of the company. (viii) Weakness The assistant accountant is responsible for dealing with customer invoices queries and the issue of sales credit notes. Implication Haydn Co’s exposure to losses is increased as a consequence of goods being despatched in response to unauthorised or bogus telephone orders. (v) Weakness Telephone orders are accepted for the despatch of the company’s products. who is totally segregated from the authorisation. Implication The sales clerks are responsible for generating sales invoices to customers and therefore have the opportunity to influence. The risk of material misstatement at the assertion level consists of two components.Recommendations The assistant accountant should have no involvement in the decision to raise sales credit notes. date the working paper was reviewed. proper assignment of personnel. Control Risk This is the risk that a misstatement that could occur in an assertion and that could be material. subject of the working paper. who has no previous connection with the audit. the results thereof. directs audit resources to the risky areas as appropriate. with an understanding of the work performed and the basis of the principal decisions taken. Audit working papers record an auditor’s reasoning in arriving at conclusions on specific areas of an entity’s financial statements. these being inherent risk and control risk: Inherent Risk This is the susceptibility of an assertion to a misstatement that could be material. It is generally accepted that the working papers prepared and retained should be sufficient such that they would provide another auditor. The extent of working papers to be prepared is a matter for the professional judgement of the auditor. It is the function of the effectiveness of an audit procedure and of its application by the auditor. and having assessed the risks of material misstatements in the financial statements at the assertion level. either individually or when aggregated with other misstatements.com . In such circumstances the auditor would need to direct an appropriate level of resources to the testing of the assertion in question. on an audit assignment where the risk of material misstatement at the assertion level has been assessed as high. and will depend on the auditor’s assessment of risk attaching to the audit assignment and the extent of substantive procedures carried out. (Full marks will be given to answers containing points as above or other relevant points) (b) The purpose of audit working papers is to record information relating to a specific audit. Customer queries should be directed to individuals involved in the preparation of sales invoices. together with other information included in the working papers. name or initials of the person reviewing the working paper. will not be prevented. on a timely basis by the entity’s internal control. It is risk that the auditor will not detect a misstatement that exists in an assertion that could be material individually or when aggregated with other misstatements. and the conclusions drawn from the audit evidence obtained. Inherent risk and control risk are the entity’s risks and they exist independently of the audit of the financial statements. file reference of the working paper – normally standard within the audit firm. in order to achieve a low level of audit risk. However the auditor is required to assess both of these components of audit risk as a basis for determining the level of substantive procedures to carry out. assuming that there were no related controls. This. the application of professional scepticism and supervision and review of the audit work performed. (Full marks will be awarded for answers including similar points to those stated as above or other appropriate points) (c) The following information should be included on the header of every working paper prepared in connection with the audit of the financial statements of Brahms Limited for the year ending 31 December 2005. This will comprise adequate planning. for relevant comments as to the implications arising from the weakness and for making appropriate recommendations) 2 (a) Audit risk is the risk that the auditor expresses an inappropriate audit option when the financial statements are materially misstated. An auditor adopting a risk-based auditing approach obtains an understanding of an entity and its environment. timing and extent of the auditor’s procedures. the nature. The audit risk model used by auditors. could be useful in the event of there being litigation against the audit firm in connection with the audit or for the planning of future audits. For example. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) The The The The The The The The client’s name – Brahms Co. (Full marks will be awarded for answers identifying only FOUR weaknesses in the system. detection risk must be set as low. timing and extent of audit procedures performed. dictates that for a given level of audit risk. or detected and corrected. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. either individually or when aggregated with other misstatements.blogspot. name or initials of the person preparing the working paper. Detection risk relates to the nature. date the working paper was prepared. on the planning of the audit work. the acceptable level of detection risk bears an inverse relationship to the assessment of the risk of material misstatement at the assertion level. balance sheet date – 31 December 2005. Review charges to overhead expenses in period following balance sheet date and ensure none incorrectly omitted from accruals. (v) (c) Classification – transactions and events have been recorded in the proper accounts. Area of financial statements Sales Procedure to verify completeness Follow despatch notes through to sales invoicing and check for posting to sales account.3 (a) The five generalisations about the reliability of audit evidence are: – – – – Audit evidence is more reliable when it is obtained from independent sources outside the entity. observation of the application of a control) is more reliable than audit evidence obtained indirectly or by inference (for example. Trade payables Accrued expenses Provisions Inventory Non-current assets (Full marks will be awarded for stating the above or other relevant substantive procedures) 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Audit evidence is more reliable when it exists in documentary form. Completeness – all transactions and events that should have been recorded have been recorded. – (b) The implied or explicit management assertions made about classes of transactions and events for the period under audit are: (i) (ii) Occurrence – transactions and events that have been recorded have occurred and pertain to the entity.com . Examine correspondence from company’s legal advisers to ensure that management have considered all payments relevant to current litigation. Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective. Audit evidence obtained directly by the auditor (for example.blogspot. inquiry about the application of a control). electronic or other medium (for example. a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed). Identify assets owned by the company and check to ensure inclusion in non-current assets register. whether paper. Review unmatched goods received notes on hand at the balance sheet date and verify posting to payables account. Attend year end inventory count to ensure that all inventories are listed for subsequent valuation. (iv) Cut-off – transactions and events have been recorded in the correct accounting period. Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles. (iii) Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately. The auditor may wish to carry out the following substantive procedures to test for completeness. This knowledge should include developments in both accounting and auditing standards. (Full marks will be awarded for stating the above or other appropriate qualities) (b) Materiality is concerned with errors in. for example in an actuarial valuation. For example. in deciding the extent of reliance to be placed on a specific verbal management representation. it is important that the auditor retains contemporary knowledge of relevant accounting and auditing issues. If an auditor does not display these attributes then it is unlikely that others will rely on his judgement or opinion. for example on the interpretation of the terms of a legal agreement.4 (a) A qualified external auditor should possess the following personal qualities. for example a large engineering machine.’ (Full marks will be awarded for definitions similar to the above) (c) An auditor may need to obtain audit evidence from an expert to provide an independent: – valuation of assets. It can be defined in the following terms: ‘Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.com . Good Information Technology Skills Most entities make use of information technology for financial reporting and operational purposes. (i) Management typically provide accounting estimates in connection with: – general provisions for the write down of inventory valuation – depreciation provisions – accrued revenue – provisions for losses on lawsuits – profits or losses on construction contracts in progress – provisions to meet warranty claims (Full marks will be awarded for identifying four of the above or other relevant matters) (ii) The – – – auditor should adopt one or a combination of the following approaches in the audit of an estimate: review and test the process used by management to develop the estimate use an independent estimate for comparison with that prepared by management review subsequent events which confirm the estimate made. Integrity There is an expectation from users of audited information that an auditor will at all times be honest. In determining the quantity and quality of this evidence. most audit firms use computer-assisted audit techniques to assist them in their audit work. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. for example on a long term building contract. a set of financial statements. Thus. and experience and with different cultural backgrounds. If the auditor is unable to communicate effectively both orally and in writing. – determination of a valuation using specialised techniques. Similarly. Thorough Knowledge of Accounting and Auditing Issues Given that it is the auditor’s responsibility to prepare a report on the financial statements of an entity. Professional Scepticism During the course of an audit assignment. Consequently if an auditor does not possess good information technology skills then he/she may not be able to contribute effectively to the audit process. the auditor must know when it is prudent to exercise professional scepticism. Good Communication Skills In order to carry out a satisfactory audit. (d) 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. – determination of quantities of assets. for example stockpiles of minerals. it is likely that ineffective audit procedures will be carried out. Objectivity As with integrity (above) an auditor’s objectivity must be beyond question if he/she is to report as auditor. – legal opinion. for example land and buildings. materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful. – measurement of completed works. irrespective of any pressure that is brought to bear. or omissions from. the auditor must find sufficient appropriate evidence to support the audit opinion. the auditor must be able to communicate effectively with individuals. Consequently a qualified auditor must have the ability to retain independence of mind whilst carrying out his/her professional duties. fair and truthful.blogspot. possessing varying levels of seniority. – determination of the condition of plant and machinery. com .blogspot.FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. account balances or disclosures. Generally 1 mark per point up to a maximum of (c) Listing of the information that should be included on the header of every working paper. Generally 11/2 marks per assertion for up to four attributes. Generally 1 mark per point up to a maximum of Commentary on the matters to be considered generally in assessing the extent of working papers to be prepared. up to a maximum of (4 marks) (6 marks) mark per point for recommending an improvement to address the weakness. and the marks adjusted to ensure that the total awarded is fair. If the answer is of a pass standard then it should be awarded a minimum of 40%. Generally 1 mark per component up to a maximum of (b) (5 marks) Stating objectives of the internal control which should be exercised over the sales and trade receivables system of Haydn Co. Generally 1/2 mark per point up to a maximum of (4 marks) Total (25 marks) (3 marks) (4 marks) (14 marks) Audit Evidence 3 (a) Stating the generalisations about the reliability of audit evidence. if it is below a pass standard then it should be awarded less than 40%.blogspot. Generally 11/2 marks per procedure up to a maximum of (9 marks) Total (25 marks) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Generally 1 mark per objective up to a maximum of (4 marks) (c) Sales and trade receivables system. consideration should be given to the depth and relevance given by each candidate when answering the question. The majority of the questions require several points to be included within the answer. up to a maximum of (c) (6 marks) (10 marks) Description of substantive procedures the auditor may carry out to verify the completeness of classes of transactions. up to a maximum of (6 marks) Total (25 marks) Brahms Co 2 (a) Explanation of the term ‘a risk-based approach to an audit’ Generally 1 mark per point up to a maximum of (b) Explanation of the purpose of audit working papers. In conclusion. Generally 1 mark per point for identifying a weakness in the system. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. Haydn Co 1 (a) Stating the components of internal control. up to a maximum of Generally Generally 11/2 11/2 mark per point for describing the implication of the weakness. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Generally 2 marks per point up to a maximum of (b) Stating management assertions made about classes of transactions and events for the period under audit. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade.com . After marking each question. and their overall mark should be lower than a candidate who provides a range of points. However. the candidate should be given full credit for such points. the total mark awarded should be evaluated to assess whether it is fair. so if a candidate concentrates on a few points then they should not be given as much recognition.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) December 2005 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. com .blogspot. Generally up to 11/2 marks for each matter identified up to a maximum of (6 marks) (ii) Outline the approaches that an auditor should adopt. Generally 1 mark for each reason up to a maximum of (b) Explanation of the term ‘materiality’ of Generally 1/2 mark per point up to a maximum of (c) (i) (3 marks) (4 marks) (2 marks) Identifying situations during the course of an audit where an auditor may need to obtain evidence from an expert. Generally 1/2 mark for each example up to a maximum of (2 marks) (d) (i) Identifying matters where management typically provide accounting estimates. Generally up to 11/2 marks for each point up to a maximum of (4 marks) Total (25 marks) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.Student Enquiries 4 (a) Stating personal qualities a qualified external auditor should possess. Generally 1 mark for each situation identified up to a maximum of (4 marks) (ii) Providing a practical example for each situation identified above. Generally 1/2 mark for each quality stated up to a maximum of Stating reason why auditor should possess quality. blogspot.Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 12 JUNE 2006 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com Paper T8(INT) . he colluded with another senior manager of the company.682 received from the company’s customers. (8 marks) (d) Briefly comment as to whether the directors of Rose Co would appear to be justified in asserting that the company’s auditors were negligent in not detecting the fraud perpetrated by the company’s financial director and another senior manager during the year ended 31 January 2006.500 customers to whom it sells on credit terms and it employs a manager and five clerks in its sales accounting function. and (ii) For each type of control activity in (i). Required: (a) Explain why it is important that the directors of Rose Co should ensure that the company has an effective system of internal control. and have subsequently asserted that the auditors of Rose Co were negligent in not having discovered the fraud whilst auditing the company’s financial statements for the year ended 31 January 2006. to misappropriate individual sums totalling $9. a haulage contractor company with sales of $7 million and profits of $1 million for the financial year ended 31 January 2006. The auditors have stated that the directors are being unreasonable in making this assertion and are confident that an independent review of their audit working papers will confirm that they have not been negligent in their audit work. (6 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The circumstances of the financial director’s dismissal were that in the six month period up to 31 October 2005. provide an example of how it may be employed on a day to day basis to control the sales accounting function of Rose Co. Following his dismissal. The company has over 1. An audit partner at your firm has written to the directors of Rose Co confirming that the firm will review the various components of the company’s internal controls. He has explained however that any system of internal control can only provide reasonable assurance that the company’s financial reporting objectives will be achieved. (3 marks) (b) (i) State FOUR types of control activity. including control activities employed.com . recently dismissed its financial director for misappropriating company funds. (8 marks) (c) Explain why any system of internal control can provide an entity with only reasonable assurance that the entity’s financial reporting objectives will be achieved. The directors discovered the fraud following a meeting between one of the customers and the managing director of Rose Co in April 2006.ALL FOUR questions are compulsory and MUST be attempted 1 Rose Co.blogspot. the remaining directors of Rose Co asked your firm to carry out a full review of the company’s internal control system with a view to recommending improvements as appropriate to guarantee the effectiveness of the controls. blogspot.O. (8 marks) (b) Your firm is about to tender for the appointment as auditors to Tulip Co.com [P.000 loan from an independent finance company. a company which provides adventure holidays for groups of school children. Your firm has no previous experience of auditing a company engaged in the adventure holiday sector. The purchase was financed by a further issue of ordinary shares in the company for $600. in order to obtain an understanding of the business. (6 marks) (c) State the audit procedures that your firm should carry out to verify the ownership and existence of the office building purchased during the year. The company purchases land and develops it by building commercial premises. John has had discussions with the audit manager who would be assigned to the Tulip Co audit. in the financial statements of Bluebell Co for the year ending 30 June 2006. either for sale or for rental. John is confident that by ensuring good audit planning. and (iii) the disclosure of the loan and of the related interest charges. and together they have decided that if the tender is successful. if it wins the tender for the audit of the company. your firm’s audit engagement partner has established that the company has a good control environment. the firm will use document flowcharts to record the company’s accounting and internal control systems. (4 marks) (25 marks) 3 Bluebell Co is an audit client of your firm and has 200 employees. John White. Bluebell Co has purchased an office building for its own use at a cost of $900. (9 marks) (ii) Explain the term ‘properly directed substantive procedures’ in the context of a risk based audit approach. The loan is secured by a fixed charge over the office building and is repayable over a period of four years. (4 marks) (iii) Identify FOUR benefits of using document flowcharts to record a company’s accounting and internal control systems. Your audit manager has confirmed that each of these is a good source of evidence as a means of verifying specific matters reflected in the company’s financial statements. (ii) the related interest charges. . a thorough understanding of the business and properly directed substantive procedures. (5 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (9 marks) (b) Identify SIX specific matters in respect of which the minutes of the directors’ board meetings of Bluebell Co should provide useful evidence in the audit of the company’s financial statements for the year ending 30 June 2006. Required: (i) Identify SIX areas of the business operations of Tulip Co on which your firm should obtain detailed knowledge. Having had an initial meeting with the directors of the company. In addition to its land development activity. (5 marks) (d) State the audit procedures that your firm should carry out to verify: (i) the amount of the loan from the finance company.000 and by a $300. You have been assigned to the audit of the financial statements of Bluebell Co for the year ending 30 June 2006 and have been instructed to arrange for a bank confirmation letter from the company’s bank and also to obtain copies of the minutes of the directors’ board meetings for the year. the firm will be able to carry out an efficient and effective audit of the financial statements of Tulip Co. during the year ending 30 June 2006.T. Required: (a) Identify SIX specific matters with regard to the financial statements of Bluebell Co for the year ending 30 June 2006 which should be confirmed in the confirmation letter from the company’s bank.000.2 Required: (a) Identify and explain FOUR matters that an auditor should consider when evaluating the control environment of an entity. However. in accordance with the identified financial reporting framework.blogspot. then he should express an unqualified opinion in his auditor’s report on those financial statements. (3 marks) (3 marks) (3 marks) (b) Auditors often use analytical procedures as substantive procedures to reduce detection risk relating to specific financial statement assertions. (6 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Required: Explain FOUR factors that determine the extent of reliance that auditors may place on analytical procedures to reduce detection risk. (10 marks) (c) It is standard practice during the course of an audit of a company’s financial statements for a letter on internal control (also referred to as a management letter or a letter of weakness) to be issued by the auditors. and state when and to whom it should be issued. (iii) Adverse opinion. Required: Explain the nature and purpose of a letter on internal control.com . Required: Describe the circumstances in which each of the following should be expressed in an auditor’s report. (i) Qualified opinion.4 (a) When an auditor concludes that the financial statements of a company give a true and fair view. (ii) Disclaimer of opinion. com .blogspot.Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Additionally. but individuals responsible for conducting the review may not understand the purpose of such reports and. there is an inherent weakness in any internal control system that is directed at routine transactions rather than non-routine transactions. Additionally. For example.) (b) Specific control activities and examples of how each may be employed on a day to day basis to control the sales accounting function of Rose Co include: (i) Authorisation Example The authorisation of an increased credit limit for an existing customer. Further inherent limitations in any system of internal control include the possibility that procedures may become inadequate due to changes in conditions – for example.) (c) Internal controls.) 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (NOTE: Full marks will be awarded for stating FOUR of the above or other activities together with appropriate examples. management may enter into side agreements with customers that alter the terms and conditions of the entity’s standard sales contracts. will not be met thus adversely affecting the successful functioning of the company. Also.com . accordingly. (NOTE: Full marks will be awarded to answers not necessarily containing all of the above points. with regard to these matters.blogspot.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2006 Answers 1 (a) As with any operating company. The likelihood of achievement is affected by limitations inherent to internal control. automated controls may be designed to report transactions over a specified amount for management review. which may result in improper revenue recognition. (ii) Performance Reviews Example Regular review of the company’s aged receivables list by a senior manager of the company to monitor the effectiveness of the company’s credit control procedures. existing control activities may be inadequate to cope with the volume of sales transactions. exception checks in a software program that are designed to identify and report transactions that exceed specified credit limits may be overridden or disabled. (v) Segregation of Duties Example Division of duties in the sales accounting function to ensure that individuals who accept orders from customers do not have any part in the processing of sales invoices or the receipt or processing of cash receipts from customers. controls can be circumvented by the collusion of two or more people or inappropriate management override of internal control. in a company experiencing rapid growth in sales. such as simple errors or mistakes. can provide an entity with only reasonable assurance about achieving the entity’s financial reporting objectives. is inherently weak. These include the realities that human judgement in decision-making can be faulty and that breakdowns in internal control can occur because of human failures. Errors also may occur in the use of information produced by IT. that it complies with applicable laws and regulations and that it has a reliable financial reporting system. If the company does not have an effective system of internal control. in order for Rose Co to function successfully the directors of the company must ensure that the company’s operations are effective and efficient. For example. an accounting system which does not incorporate sufficient controls to properly identify and process transactions relating to the purchase of non-current assets. prior to updating the customer master file date. then it is probable that corporate objectives. For example. (iv) Physical Controls Example The restriction of access to computer terminals to authorised users only. may fail to review them or investigate unusual items. no matter how well designed and operated. (iii) Information Processing Example The daily processing of customer sales invoices through an integrated general and account receivables ledger system. (NOTE: Full marks will be awarded to answers containing the above or other appropriate points. advance booking incentives for customers and details of expanding and declining activities.) 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.) 2 (a) When evaluating the control environment of an entity. Employment practices within the adventure holiday sector generally and within the company. counselling. However they should have planned and performed their audit procedures with an attitude of professional scepticism recognising that conditions or events could be found indicating fraudulent activity. including internet sales and marketing activities. Information about the market in which Tulip Co operates. income from the provision of accommodation and from the sale of meals. (iii) Management’s philosophy and operating style – management’s approach to taking and managing business risks. use of temporary ‘seasonal staff’. compensating and remedial actions. evaluating. (vi) Human resources policies and practices – recruitment. for example. – – (NOTE: Full marks will be awarded to answers identifying any SIX of the above or other relevant matters. Commitment to competence – management’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. pricing policies and the marketing strategy and objectives of the company. employment costs. they were entitled to assume that there was no fraudulent activity during the year.com . Details of any alliances or joint venture activities entered into by the company together with details of any activities outsourced to third parties.(d) The amount of money defrauded from the company of $9. From the auditors’ perspective.blogspot. The extent of the company’s involvement in electronic commerce. including accommodation costs. (v) Assignment of authority and responsibility – how authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established. indemnity insurance costs and those relating to general administration. the employment of specialist staff. the size of the market. it is unlikely that the auditors would be found to have been negligent in not detecting the fraud. The geographic spread of the activities of the company and the type and extent of activity at each location. administration and monitoring of controls. These may include for example. For example. (NOTE: Full marks will be awarded for identifying FOUR of the above or other appropriate matters. executed. controlled and reviewed. Consequently the directors’ assertion appears to be unjustified. training. major competitors. However the fact that the fraud was committed is indicative of a problem with the day to day systems of control within the company and the directors are therefore justified in having concerns about this. (NOTE: Full marks will be awarded to answers not necessarily containing all of the above points. Given these factors and the immateriality of the sum involved. (iv) Organisational structure – the framework within which an entity’s activities for achieving its objectives are planned. refreshments and souvenirs. Information about the way the company conducts its operations for example. then providing a review of the auditors’ working papers does not reveal inadequacies in their audit procedures. it is probable that the fraud was carefully orchestrated by the financial director and the senior manager. an auditor should consider the following matters: (i) (ii) Communication and enforcement of integrity and ethical values – essential elements which influence the effectiveness of the design. the range of adventure holidays offered. promoting. staff training issues and remuneration levels within the sector.682 over a six month (mid-year) period. and management’s attitudes and actions towards financial reporting. Given that the total sum defrauded from Rose Co amounts to $9.682 during the year ended 31 January 2006 represents less than 1% of reported net profit and is therefore not material in the context of the disclosures made in the financial statements of Rose Co. so that only small individual amounts were targeted for fraud at a time when it was unlikely that the auditors would be present at the company. It is generally recognised that it is often difficult to detect fraudulent activity when it is perpetrated by two senior managers of a company who collude to conceal the losses consequently incurred. orientation.) (b) (i) The areas on which my firm should obtain detailed information include: – – – – – – The various income streams of Tulip Co. unless their audit of Rose Co’s financial statements revealed evidence to the contrary. information processing and accounting functions and personnel. the company’s market share. Details of the company’s cost structures. (iii) The benefits of using document flowcharts to record a company’s accounting and internal control systems are that they: – – – – – enable the systems to be recorded in a standard format which is easily understood by specialist and non-specialist audit staff. or associated companies where it is known that a relationship has been established with Bluebell Co during the year ending 30 June 2006. (ix) the payment for significant material items of overhead expenditure during the year – for example special advertising costs to find tenants for a completed commercial building. highlight relationships between different parts of a system.com . (viii) the company’s pay structure including the authorisation of general pay increases to employees. (x) the valuation of work-in-progress to be reflected in the company’s financial statements for the year ending 30 June 2006. an auditor who has assessed an unacceptably high level of risk of material misstatement in the purchases area of a company’s financial statements may reduce this risk by employing properly directed substantive procedures on purchases transactions. (vii) appointments of senior employees during the year.) 3 (a) The following matters should be confirmed in the confirmation from the company’s bank: (i) (ii) titles and account numbers of all bank accounts held in the name. documents of title or deed boxes.) 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. or other banks.) (b) The minutes of the directors’ board meetings of Bluebell Co should provide useful evidence with regard to the authorisation of and further information on: (i) (ii) the purchase of development land during the year by the company including the purchase terms. (NOTE: Full marks will be awarded for stating SIX of the above or other appropriate matters. joint name or trade name of Bluebell Co as at 30 June 2006. bottlenecks and weaknesses are more easily identified. (iv) particulars of any written acknowledgement of set-offs relating to accounts and balances held on behalf of the company. together with confirmation of balances held in those accounts. The minutes should confirm the authority for these transactions together with information on the related costs arising. (vii) details of any other assets held by the bank. for example share certificates. including capital commitments as at 30 June 2006. provide an overview of a system such that superfluous documents.(ii) When adopting a risk based approach to an audit. Encourage a disciplined approach to the recording of a system in that the originator of a flowchart must have a good understanding of the system being recorded. full titles and dates of closure of all accounts closed in the name. (vi) the capital expenditure program of the company during the year. (NOTE: Full marks will be awarded for stating FOUR of the above or other perceived advantages. (iii) full details of interest charged or received on accounts held during the year if not specified on bank statements. (v) details of overdrafts and loans repayable on demand together with details of other loans and facilities. For example. (NOTE: Full marks will be awarded for stating SIX of the above or other relevant matters. for example the total of any bills discounted with recourse. (ix) a list of branches of the bank. (vi) details of any assets of Bluebell Co which are held as security by the bank. contracts entered into by the company during the year for the development of land. (iv) the purchase of the office building during the year including the purchase terms. joint name or trade name of Bluebell Co during the year ending 30 June 2006. (iii) sale and rental agreements in connection with completed development projects during the year. auditors should direct their substantive procedures to areas of the financial statements where there is an unacceptably high risk of material misstatement. (v) the financing of the purchase of the office building including the further issue of ordinary shares and the acquiring of the loan from the finance company. This risk is a function of inherent risk and control risk as assessed by the auditor and can normally be reduced to an acceptably low level by using properly directed substantive procedures. (viii) full details of any contingent liabilities.blogspot. present systems information in a logical sequence. for Bluebell Co. other procedures performed by the auditor in reviewing the collectibility of accounts receivable. (c) A letter on internal control (also referred to as a management letter or letter of weakness) is a letter usually forwarded by an auditor to the senior management of a company.com . (d) My firm should carry out the following procedures to verify the amount of the loan from the finance company and its disclosure in the financial statements together with that of the related interest charges. for example. examine entry in the company’s non-current assets register to ensure consistency with ownership and existence. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. probably from legal representatives. obtain corroborative evidence of existence and ownership by vouching payments in relation to insurance of property. verify existence by physical inspection of property. (ii) (iii) accuracy with which the expected results of analytical procedures can be predicted. the rate of interest chargeable. (b) The extent of reliance that the auditor places on the results of analytical procedures is determined by the following factors: (i) materiality of the items involved. (iv) assessments of inherent and control risks. other audit procedures directed toward the same audit objectives for example. such as research or advertising. However. scrutinise minutes of directors’ board meetings of the company to obtain evidence of actions consistent with ownership/existence of the building. The letter should normally be forwarded immediately following the completion of the tests of control and before the commencement of substantive procedures. might confirm or dispel questions raised from the application of analytical procedures to an ageing of customers’ accounts. (iv) verify the amount of the loan outstanding at the balance sheet date and ensure that this is accurately stated and fully disclosed in the company’s balance sheet. the auditor may rely solely on analytical procedures for certain income and expense items when they are not individually material. The amount of the loan outstanding should be disclosed as repayable within 12 months and repayable after 12 months from the balance sheet date. (iii) check the accuracy and disclosure of interest charge payments and accruals in the company’s profit and loss account. (ii) (iii) Adverse opinion – An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. For example. the auditor will ordinarily expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses.(c) My firm should carry out the following procedures to verify the ownership and existence of the office building purchased during the year: – – – – – – examine purchase documentation. (v) Check the note to the company’s financial statements to ensure that full disclosure is made with regard to the security for the loan. the auditor does not rely only on analytical procedures in forming conclusions. for example. (i) (ii) examine the loan agreement to verify the amount of the loan. or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. Disclaimer of opinion – A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements. repairs to premises and utility bills. when inventory balances are material. such as the review of subsequent cash receipts. verify title to property by inspecting land registration document or obtain confirmation of title from company legal representatives. confirm the actual amount of the loan received by vouching receipt into the company’s accounting records and by the company bank. If applicable examine property purchase documentation to verify direct payment of loan funds to third party seller of commercial property. more reliance on tests of details of transactions and balances than on analytical procedures in drawing conclusions on receivables may be required. if internal control over sales order processing is weak and therefore control risk is high. confirming purchase of property during the year. the security provided and the repayment terms. 4 (a) (i) Qualified opinion – A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management. the operation of the systems of accounting and internal control.The letter contains weaknesses identified in the entity’s system of internal control as identified by the auditor or members of his audit team. when performing tests of control and the purpose of the letter is to bring these weaknesses to the attention of management. For both categories the implication(s) of the weakness(es) should be identified.com . 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. and will be classified as those relating to: (i) (ii) the design of the systems of accounting and internal control. The weaknesses identified in the main body of the letter should be those which could lead to fraud or material error in or omission from the company’s financial statements.blogspot. however minor control issues which the auditor would wish to bring to the attention of the company’s senior management should be included in an appendix to the letter of weakness or in a supplementary report. blogspot. Generally 1 mark per point up to a maximum of (6 marks) Total (25 marks) (d) TULIP CO 2 (a) (b) Identifying and explaining four matters that an auditor should consider when evaluating the control environment of an entity. and the marks adjusted to ensure that the total awarded is fair. Generally up to 1 mark per point up to a maximum of (4 marks) (iii) Identifying four benefits of using document flowcharts to record a company’s accounting and internal control systems. If the answer is of a pass standard then it should be awarded a minimum of 40%. In conclusion. and their overall mark should be lower than a candidate who provides a range of points. Generally up to 1 mark for each advantage identified up to a maximum of (4 marks) Total (25 marks) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. Generally 1 mark for each control activity up to a maximum of Providing an example of the employment of each control activity. However. if it is below a pass standard then it should be awarded less than 40%. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade. ROSE CO 1 (a) (b) Explaining the importance of an effective system of internal control. the candidate should be given full credit for such points. Generally 1 mark for each matter identified and 1 mark for explanation up to a maximum of (4 x 2 marks) (8 marks) (i) (ii) Identifying six areas of the business operations of Tulip Co on which an audit firm should obtain detailed knowledge. consideration should be given to the depth and relevance given by each candidate when answering the question. so if a candidate concentrates on a few points then they should not be given as much recognition. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. After marking each question. the total mark awarded should be evaluated to assess whether it is fair. Generally 1 mark per point up to a maximum of (8 marks) Briefly commenting on the directors’ assertion that the company’s auditors were negligent in not detecting the fraud perpetrated. Generally up to 11/2 marks for each matter identified up to a maximum of (9 marks) Explaining the term ‘properly directed substantive procedures’ in the context of a risk based audit approach. Generally 1 mark for each relevant example up to a maximum of (3 marks) (4 marks) (4 marks) Explaining why any system of internal control can provide only reasonable assurance that financial reporting objectives will be achieved. The majority of the questions require several points to be included within the answer.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2006 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Generally 1 mark per point up to a maximum of (i) (ii) (c) Stating four types of control activity. Generally up to 1 mark for each procedure stated up to a maximum of (5 marks) Stating the audit procedures that the firm should carry out to verify the amount of loan from the finance company and its disclosure together with that of the related interest charges in the financial statements of Bluebell Co for the year ending 30 June 2006.blogspot.BLUEBELL CO 3 (a) Identifying six specific matters with regard to the financial statements of Bluebell Co which should be confirmed in the confirmation letter from the company’s bank. Generally up to 1 mark per point with a maximum of up to 3 marks for each factor. Generally up to 11/2 marks for each matter stated up to a maximum of (9 marks) Identifying six specific matters in respect of which the minutes of the directors’ board meetings of Bluebell Co should provide useful evidence in the audit of the company’s financial statements. Generally up to 1 mark for each matter stated up to a maximum of (6 marks) Stating the audit procedures that the firm should carry out to verify the ownership and existence of the office building. Generally up to 1 mark for each point up to a maximum of (6 marks) Total (25 marks) (c) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Generally up to 1 mark for each procedure stated up to a maximum of (5 marks) Total (25 marks) (b) (c) (d) FINANCIAL STATEMENTS OF A COMPANY 4 (a) Describing the circumstances in which the following should be expressed in an auditor’s report: (i) Qualified opinion (ii) Disclaimer of opinion (iii) Adverse opinion Generally 1 mark for each point in respect of each of the above up to a maximum of (3 x 3) (b) (9 marks) Explaining four factors that determine the extent of reliance that auditors may place on analytical procedures to reduce detection risk.com . with an overall maximum of (10 marks) Explaining the nature and purpose of a letter on internal control and stating when and to whom it should be issued. com Paper T8(INT) .Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 11 DECEMBER 2006 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. by staging local culture evenings at its indoor arena. (6 marks) Note: You should assume that there are a sufficient number of employees to implement any required controls. is operated by the snack bar manager and his staff. At the end of each night the cashier ensures that the total cash takings in the drawer equate to the entrants counted on the turnstile meter multiplied by the standard entry charge as set by the directors of Rhodes Co.blogspot. for use by the cashier. The entertainment is provided every evening throughout the holiday season and comprises members of the local community performing dance routines in traditional costume and others demonstrating acrobatic skills. (9 marks) (c) State FOUR controls that Rhodes Co should employ over the subsequent access to and recording and banking of the sales income from the culture evenings as deposited into the company’s night safe. for the next day attention of the company’s accounts department.ALL FOUR questions are compulsory and must be attempted 1 Rhodes Co provides entertainment for holidaymakers in a large resort. Customers gain entry into the arena’s audience area through a turnstile located alongside the arena cashier’s kiosk in the foyer of the arena building. Prior to finishing her work the cashier puts the takings into a designated cash wallet and deposits the wallet in the secure night safe of Rhodes Co. which he counts without assistance. a meter connected to it and located inside the kiosk. After zeroing the turnstile meter for future use she then e-mails.com . The safe is of a hole in the wall design. containing a permanent small cash float. confirmation of the number of customer entrants and the total kiosk takings. writing a note on the listing to explain any differences between the totals. As customers pay and enter through the turnstile. in addition to staff who carry out specific tasks. He then empties the takings from the vending machines and puts these together with those from the snack bar sales and the till listing into a designated wallet. all of whom have had training in its use. (7 marks) (3 marks) (ii) Recommend SIX improvements to address specific weaknesses in the controls over entry charges and the snack bar income. Snack Bar Income This comprises snack bar sales and income from vending machines located in the snack bar area. At the end of each night the snack bar manager obtains a listing from the till of all transactions registered and compares the total to the actual cash takings. a manager and three assistant managers are in attendance nightly to supervise activity at the arena. in (b) and (c) above. located in a secure room inside the company’s premises and allows ‘deposit only’ access to arena employees with full access being granted to specified accounts department employees of Rhodes Co who are responsible for the removal of deposits from the safe. containing a small permanent cash float. The arena forms part of a building which houses Rhodes Co’s administrative and accounting functions together with a snack bar used by customers attending the culture evenings. (b) With regard to the controls exercised over sales income received from the culture evenings: (i) Explain why the auditors of Rhodes Co could not rely on the controls as a basis for verifying completeness of sales income. Required: (a) State THREE objectives of the internal controls that should be exercised over cash sales. prior to depositing the wallet in the night safe of Rhodes Co. The company accepts only cash payment from culture evening customers and. The following controls are exercised over the income from the culture evenings: Entry Charges The company does not issue entry tickets. The kiosk does not have a cash register but it is furnished with a cash drawer. automatically counts the number of entrants. The bar’s automated cash register (till). . (2 marks) (d) Describe FIVE functions performed by audit software and for each function suggest how it could be used for a specific task by the external auditors of Malaga Co. the audit manager made the following statements: (i) ‘whilst we are all aware of the benefits that Malaga Co should have gained from using a computer-based accounting system.T.’ (ii) ‘we will be using audit software.’ Required: (a) State FOUR benefits that Malaga Co should have gained from using a computer-based accounting system. (10 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.O. At the audit briefing meeting.com [P. (9 marks) (c) Explain the term ‘audit software’. a large engineering company are now in the course of auditing the company’s financial statements for the year ended 31 October 2006.2 The auditors of Malaga Co.blogspot. (4 marks) (b) State SIX specific risks that the use of a computer-based accounting system poses to an entity’s internal controls. we need to be alert to the specific risks that a computer-based accounting system poses to an entity’s internal controls. he does not understand that there are several recognised methods that an auditor may adopt when selecting a sample of items to be tested from a population.com . It has 85 employees.3 Paphos Co trades as a department store. you have been assigned to the audit of wages. and a large administration and accounts department with appropriate segregation of duties. in reporting wages costs of $1·62 million in the financial statements of the company for the year ended 30 September 2006. some of whom are hourly paid. using a computerised payroll system to process wages. Wages costs are reported as $1·62 million in the financial statements of Paphos Co for the year ended 30 September 2006. Your firm is auditing the company’s financial statements for the year ended 30 September 2006 and. it is apparent that he does not understand the concept of obtaining evidence to verify the assertions made implicitly or explicitly by management and contained in a company’s financial statements. supervisory controls and authorisation levels throughout the various accounting functions. Similarly. (2 marks) (2 marks) (3 marks) (ii) Haphazard selection. Required: (a) State FOUR financial statement assertions made by the directors of Paphos Co. prior to making payment directly into employees’ bank accounts. from discussions with the audit junior. together with an inexperienced audit junior. (c) Identify SIX tests of control that you should carry out in connection with the audit of the reported wages costs in the financial statements of Paphos Co for the year ended 30 September 2006. (12 marks) (25 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (6 marks) (b) Explain the following terms as applied to audit sampling methods and contained in ISA 530 Audit Sampling and Other Means of Testing: (i) Random selection.blogspot. The company pays all employees on a weekly basis. (iii) Systematic selection. You are about to commence tests of control on the wages system. However. com . set out the accounting ratio that should be used by a firm of auditors when analysing the financial statements of a company operating a supermarket chain: (i) Working capital turnover. (8 marks) (ii) For each activity identified above. (v) Non-current assets turnover. operating a supermarket chain. provide a practical example. provide a practical example.’ Required: (a) Identify the stage or stages of an audit. (6 marks) (b) For each of the efficiency measures listed below. operating a supermarket chain. (6 marks) (25 marks) (ii) For each area identified above. (iv) Total assets turnover. where an audit firm may need to rely on the work of an expert. (iii) Payment period for trade payables. and by using the work of internal auditors and the work of an expert. as stated in ISA 520 Analytical Procedures. may be typically involved. (ii) Average inventory turnover. could be more effectual by making use of appropriate analytical procedures. (d) (i) Identify THREE areas in the financial statements of a company.4 ‘The auditors of a company operating a supermarket chain. End of Question Paper 5 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. during which an audit firm should use analytical procedures and explain the purpose of the use at each stage.blogspot. (c) (i) (5 marks) Identify FOUR activities in which the internal audit department of a company. blogspot.Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . The major problem associated with the current procedures is the lack of segregation of duties in both the entrance kiosk and snack bar area where the cashier and snack bar manager respectively. The task of emptying the takings from each vending machine should be undertaken jointly by the two responsible officials (above). The schedule. Existing controls over both the kiosk cashier and bar manager with regard to the receipt of sales revenues are open to easy override by them. or undetected error. signed by both officials as evidence of checking. The schedule should be annotated with any discrepancies for subsequent investigation and appropriate action by the management of Rhodes Co. This record should be retained by the arena manager. filed for future reference as appropriate. allocated between snack bar sales and vending machines. and be available for inspection and comparison by senior officials of Rhodes Co. with tickets being mechanically/automatically issued to customers. Any discrepancies revealed in the reconciliation and checking process should be immediately investigated. automatically linked to the ticket issue mechanism. a formal schedule should be prepared. After counting the kiosk takings. The inventory of un-issued tickets should be subject to rigid control by a responsible official of Rhodes Co. should then be put into the wallet together with the kiosk takings for the night ready for deposit into the night safe of Rhodes Co.blogspot. A copy of the schedule should be retained by the arena manager. If the company is unable to introduce an improved turnstile counting mechanism. then entries into the arena area as recorded on the turnstile meter should be agreed to ticket issues. – – – – – Note: Full marks will be awarded for stating the above or other similar points Snack Bar Income – The snack bar sales takings and float should be counted by two responsible officials of Rhodes Co (being two from the arena manager and the assistant managers). – – – 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The activities of the cashier and bar manager are not subjected to any form of contemporary internal check procedure by other employees of the company. (ii) I would recommend the following improvements to address the control weaknesses in the system: Entry Charges – The company should issue unique pre-numbered entry tickets to all customers on entry to the arena as a basis for the subsequent reconciliation of total kiosk takings to tickets issued on a nightly basis. Procedures for the removal of takings from each vending machine on a nightly basis should facilitate the formal recording of the total amount of takings removed. evidenced by the signature of both responsible officials. irrespective of any representations to the contrary. to ensure that all such cash is properly accounted for and recorded in the entity’s records. all monies should be put in a designated wallet. reconciling the total kiosk takings to ticket issues and recorded turnstile entries into the arena area. The kiosk takings and float should be counted and reconciled to tickets issued by two responsible officials of Rhodes Co (being any two from the arena manager and the assistant managers). On completion of counting of the total cash takings.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) 1 (a) Three objectives of the internal controls that should be exercised over cash sales are: (i) (ii) to ensure that all cash to which the entity is entitled is received.com . In summary. have unsupervised responsibility to collect sales revenues from customers and to count those revenues in preparation for banking by Rhodes Co. together with the cash register listing annotated as appropriate for any discrepancies. December 2006 Answers (iii) to ensure that all such cash is banked promptly and intact. Procedures for the depositing of the wallet containing the kiosk takings and accompanying documentation into the night safe of Rhodes Co should ensure that both officials (above) are responsible for jointly making the deposit. The total takings from the bar till should be compared to the total shown on the cash register listing and explanation for any discrepancy should be sought from the snack bar manager and investigated as appropriate. A copy of the schedule should be retained by the arena manager. filed for future reference as appropriate. thus resulting in possible loss of revenue by Rhodes Co as a consequence of misappropriation or error. and a formal schedule signed by each of the responsible officials reconciling the total monies in the wallet to the snack bar sales and vending machine takings. and the kiosk cashier should not have access to un-issued tickets. the auditors could not rely on the current system due to the weaknesses identified above. A secure cash register should be provided in the kiosk for use by the cashier. (b) (i) The auditors of Rhodes could not rely on the controls as a basis for verifying completeness of the sales income from the culture evenings because the controls do not meet the sales system’s objectives. The company should ensure that the duties allocated to responsible officials are frequently rotated around the management staff. containing the snack bar income. Both officials should evidence their agreement by signing the accompanying documentation forwarded by the arena employees. (v) Monies from the wallets should be forwarded to the relevant person for the preparation of the bank paying-in slip and immediate banking. (vi) Procedures should ensure that a responsible official of the company independent from the recording and banking functions. verifies the amount on the bank paying-in slip to the underlying documentation – confirming sales income forwarded by the arena management. unauthorised access to data that may result in destruction of data or improper changes to data. for investigation as appropriate. (iii) the possibility of IT personnel gaining access privileges beyond those necessary to perform their assigned duties thereby breaking down segregation of duties. all of whom should be independent of the recording and banking functions. (v) unauthorised changes to systems or programs.– – Procedures for the depositing of the wallet. (iv) unauthorised changes to data on master files. Particular risks may arise where multiple users access a common database. and testing the output of a computer-based accounting system. (iv) The underlying documentation contained in the wallets should be forwarded to the relevant person to enable sales income details to be recorded in the accounting records of Rhodes Co and for secure filing and future reference. (v) reduce the risk that controls will be circumvented. On a daily basis. (c) The term ‘audit software’ describes the computer software used by auditors to assist them in their work. enhance the timeliness. into the night safe of Rhodes Co should ensure that both officials (above) are responsible for jointly making the deposit. Consideration should be given to the employment of a security firm to safeguard company staff and monies being transported to the company’s bank. processing inaccurate data or both. databases and operating systems. (Note: Full marks will be awarded for stating any four of the above or other relevant controls). 2 (a) The use of a computer-based accounting system should benefit Malaga Co by enabling it to: (i) (ii) consistently apply pre-determined business rules and perform complex calculations in processing large volumes of transactions or data. Similarly. The company should ensure that the duties allocated to responsible officials are frequently rotated around the management staff. (b) A computer-based accounting system poses the following risks to an entity’s internal controls: (i) (ii) reliance on systems or programs that are inaccurately processing data. (iv) enhance the ability to monitor the performance of the company’s activities and its policies and procedures. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (Note: Full marks will be awarded for identifying any four of the above or other applicable benefits). including the recording of unauthorised or non-existent transactions. discrepancies noted by the arena employees should be brought to senior management’s attention. when examining the operations of. Any discrepancies between the cash totals and that noted on the accompanying documentation should be brought to the attention of an appropriate senior manager of the company for immediate investigation and enquiry. (vi) failure to make necessary changes to systems or programs. two designated officials should remove both wallets containing the culture evening sales income from the safe and count the total monies contained therein. or inaccurate recording of transactions.com .blogspot. (vi) enhance the ability to achieve effective segregation of duties by implementing security controls in applications. (Note: Full marks will be awarded for making any six of the above or other relevant recommendations). (Note: Full marks will be awarded for stating any six of the above or other applicable risks). availability and accuracy of information. (c) The following controls should be employed by Rhodes Co over access to and the subsequent counting of income from the culture evenings: (i) (ii) Access to monies deposited in the night safe should be restricted to a very limited number of responsible officials of Rhodes Co. (iii) facilitate the additional analysis of information. (iii) Procedures should ensure that there is a segregation of duties with regard to the recording of sales revenues in the accounting records of Rhodes Co and the banking of those revenues. (vii) inappropriate manual intervention. (vi) test check of payrolls for correct treatment of deductions from salaries and wages. To highlight reported inventory movement both immediately before and after reporting dates to identify possible manipulation of inventory figures.com . to verify the existence of trade receivables. To verify completeness of sales reporting by ensuring that all invoices have been recorded. (v) the reported costs of $1·62 million have been properly classified as wages costs. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The first item may be selected on a random or haphazard basis. for example. To subdivide the population of inventory lines with a view to examining only material balances. the directors of Paphos Co made the following assertions: (i) (ii) the reported costs of $1·62 million were properly incurred and pertain to Paphos Co. (b) (i) Random Selection This is a method of selection in which items in a population have the same statistical probability of being selected. Haphazard Selection This is a method of selection in which the auditor attempts to ensure that all items in a population have the same statistical probability of being selected by choosing items haphazardly. by dividing the population by the sample size. (ii) (iii) Systematic Selection This is a method of selection in which the auditor selects items using a constant interval between selections. and for suggesting how each function could be used by the auditors of Malaga Co). (iv) the reported costs of $1·62 million relate only to the costs incurred for the year ended 30 September 2006 by Paphos Co. Performance of sequence checks – Calculation checks Stratification of data Statistical analysis Selection of items for testing – – – – (Note: Full marks will be awarded for identifying five of the above or other applicable functions. leavers or change of status details are authorised by a responsible official. (v) test check veracity of calculations of the company payroll programme. the reported costs of $1·62 million are complete and there were no other wages costs incurred during the year ended 30 September 2006. (iii) examine a sample of employees’ time records to ensure authorisation by a responsible official. (Note: Full marks will be awarded for stating four of the above or other relevant assertions). (c) I should carry out the following tests of control in connection with the verification of the wages costs of Paphos Co: (i) (ii) review a sample of employee files to verify that all starters. test check master file data and amendments and verifying to appropriate independent documentation authorised by a responsible official.blogspot. The method uses random numbers as a basis for selection. (iii) the reported costs of $1·62 million accurately reflect the total wages costs of the company for the year ended 30 September 2006. 3 (a) In reporting costs of $1·62 million for wages in the financial statements of the company for the year ended 30 September 2006. To analyse inventory movement with a view to identifying slow moving items. and thereafter the sampling interval is derived by the auditor. To ensure that overhead costs are totalled correctly in the general ledger. To select trade receivables accounts for circularisation. for enquiry.(d) Function Performed by Audit Software Highlighting of exceptions Highlighting of trends – – Use by Auditors of Malaga Co To identify exceptional wages payments outside of stated parameters. (vii) review a sample of payrolls for evidence of review and authorisation by a responsible official. (iv) witness master file update/amendment procedures and payroll preparation procedures to ensure adequate segregation of duties with regard to the wages function. Use at this stage should add to the firm’s understanding of the business and identify risk areas to which audit resources should be targeted. the internal auditors may be engaged to compare performance measures – including inventoryturnover and slow moving inventory ratios of individual supermarkets. (ii) (iii) at the final review stage – as part of the overall review of the financial statements to gain assurance that all of the audit objectives with regard to the financial statements have been met. timing and extent of other audit procedures.(viii) review a sample of payroll summaries of entries to be posted to the general ledger accounts and tracing through of the sample to ensure proper authorisation and entry into the appropriate accounts. and in the making of recommendations relating thereto. (Note: Full marks will be awarded for stating four activities as above and relevant examples or for stating any other appropriate activities and relevant examples). For example. at the detailed testing stage – in most instances analytical procedures should be used in conjunction with tests of detail to achieve a particular audit objective in relation to specific financial statement assertions. where an audit firm may need to rely on the work of an expert are: (i) (ii) non-current assets – for example in the valuation of land and buildings. internal auditors may be required to visit supermarkets throughout the chain to review compliance with health and safety laws and regulations. (iv) investments – for example in the valuation of financial securities or other investments as appropriate. (Note: Full marks will be awarded for stating six of the above or other appropriate tests of control). For example. (b) The accounting ratios are: (i) Total Sales –––––––––––––––– Net Current Assets Cost of Goods Sold –––––––––––––––––––– Average Inventory Held (ii) (iii) Trade Payables x 365 –––––––––––––––––––––– Credit Purchases in Period (iv) Total Sales –––––––––– Total Assets (v) Total Sales –––––––––––––––– Non-Current Assets (c) The internal audit department of a company. (Note: Full marks will be awarded for stating three areas from the above and any relevant examples or for stating other appropriate areas and examples) 12 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. 4 (a) Analytical procedures should be used by an audit firm as follows: (i) at the planning stage – to assist the auditor in planning the nature. inventories – for example in the quantification or valuation of inventories held at supermarkets. may be typically involved in the following activities: (i) The review and monitoring of accounting and internal control systems. (ii) (iii) The review of the economy. operating a supermarket chain. an assignment to review and monitor the sales accounting function of the chain with the objective of recommending appropriate improvements to increase efficiency. efficiency and effectiveness of the operations including non-financial controls of the company. For example. The examination of financial and operating information. (iii) provisions – for example in the quantification of a legal claim against the company. (ix) trace a sample of net payment amounts due to employees to the company’s bank statements to ensure correct and timely payment of liability due. including carrying out detailed testing of transactions and balances. other external regulations and corporate policies and directives. For example.blogspot.com . (d) Three areas in the financial statements of a company. the internal audit department may routinely be tasked with carrying out detailed testing of transactions and balances to verify information included in the company’s monthly management accounts. operating a supermarket chain. (iv) The review of compliance with laws. Generally 1 mark per point up to a maximum of Explaining why the auditors of Rhodes Co could not rely on the controls exercised over sales income received. if it is below a pass standard then it should be awarded less than 40%. Generally up to 11/2 marks per point up to a maximum of (c) (3 marks) (b) (7 marks) (9 marks) Stating FOUR controls that Rhodes Co should employ over the subsequent recording and banking of sales income. Generally up to 1 mark per point up to a maximum of Recommendation of SIX improvements to address the weaknesses in the controls. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Rhodes Co 1 (a) Stating THREE objectives of the internal controls that should be exercised over cash sales. and the marks adjusted to ensure that the total awarded is fair.ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) December 2006 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. If the answer is of a pass standard then it should be awarded a minimum of 40%. Generally 11/2 marks per control. the total mark awarded should be evaluated to assess whether it is fair. and their overall mark should be lower than a candidate who provides a range of points. so if a candidate concentrates on a few points then they should not be given as much recognition. Generally up to 11/2 marks for each specific risk up to a maximum of (9 marks) Explanation of the term ‘audit software’. After marking each question.blogspot. Generally 1 mark for each benefit up to a maximum of (4 marks) (b) Stating SIX specific risks that the use of a computer-based accounting system poses to an entity’s internal controls. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade.com . Generally up to 11/2 marks per point up to a maximum of Describing FIVE functions performed by audit software. In conclusion. the candidate should be given full credit for such points. The majority of the questions require several points to be included within the answer. However. consideration should be given to the depth and relevance given by each candidate when answering the question. Generally up to 1 mark for each function described up to a maximum of (2 marks) (c) (d) (5 marks) Suggesting how each function (described) could be used by the auditors of Malaga Co when auditing the company’s financial statements. Generally up to 1 mark for each relevant suggestion up to a maximum of (5 marks) (Total 25 marks) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. up to a maximum of (6 marks) (Total 25 marks) Malaga Co 2 (a) Stating FOUR benefits that Malaga Co should gain from using a computer-based accounting system. for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. Up to 1 mark for each example up to a maximum of (3 marks) (Total 25 marks) (ii) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (iv) total assets turnover. when an audit firm may need to rely on the work of an expert. operating as a supermarket chain. Generally up to 1/2 mark for each component in each ratio up to a maximum of (c) (i) (5 marks) Identifying FOUR activities in which the internal audit department of a company operating a supermarket chain may be typically involved. Up to 1 mark for each example up to a maximum of (4 marks) (ii) (d) (i) Identifying THREE areas in the financial statements of a company. during which an audit firm should use analytical procedures and explaining the purpose of them. (v) non-current assets turnover.blogspot. (iii) payment period for trade payables. detailed testing and final review stage up to a maximum of (11/2 marks) Then 1/2 mark for each relevant point with a maximum of 2 marks for each point up to a maximum of 2 marks for each stage up to a maximum of (41/2 marks) (b) Setting out the following (efficiency measure) accounting ratios: (i) (ii) working capital turnover. Generally up to 2 marks for each test stated up to a maximum of (12 marks) (Total 25 marks) Effective Audit Procedures 4 (a) Identifying the stages of an audit. average inventory turnover. Generally up to 1 mark for each activity up to a maximum of (4 marks) Providing a practical example for each activity above.Paphos Co 3 (a) Stating FOUR financial statement assertions made by the director of Paphos Co. Generally up to 1 mark for each area identified up to a maximum of (3 marks) Providing a practical example for each area above.com . Generally up to 1/2 mark for identifying planning. in reporting wages costs of $1·62 million in the financial statements of the company for the year ended 30 September 2006. (6 marks) Generally up to 11/2 marks for each assertion up to a maximum of Explain the following terms as applied to the audit sampling methods: (i) (ii) Random Selection Generally up to 1 mark for each point up to a maximum of Haphazard Selection Generally up to 1 mark for each point up to a maximum of (2 marks) (2 marks) (3 marks) (b) (iii) Systematic Selection Generally up to 1 mark for each point up to a maximum of (c) Stating SIX tests of control in connection with the audit of the reported wages costs. Implementing Audit Procedures (International Stream) ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 11 JUNE 2007 QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Paper T8(INT) 7J–INTPA Paper T8INT 7J–INTAA Paper T8INT ALL FOUR questions are compulsory and MUST be attempted 1 Olive Co is a large electrical goods wholesaler operating from a warehouse with a goods received area, and administration, purchasing and accounts departments. Your firm will audit the company’s financial statements for the year ending 31 July 2007. You have been assigned to the audit of the purchases and trade payables function of Olive Co and are now familiarising yourself with this prior to commencing the audit work. In discussions with your audit manager, he confirmed that Olive Co uses a batch control system when processing trade payables invoices and that the company has a strong control environment. Required: (a) (i) Explain the term ‘control environment’. (5 marks) (ii) Describe the effect that a strong control environment in Olive Co should have on your firm’s approach to the audit of the company’s financial statements for the year ending 31 July 2007. (5 marks) (b) State THREE objectives of the internal control that should be exercised over a purchases and trade payables system. (3 marks) (c) With regard to the purchase of electrical goods by Olive Co, state the control activities that should exist over: (i) Ordering of goods; (ii) Receipt of goods; (iii) Receipt and authorisation of supplier invoices prior to batch processing. Note: Your answer should describe any appropriate documentation and related controls. (12 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com 7J–INTAB Paper T8INT 2 Palm Co is a manufacturing company preparing its annual financial statements to 31 August. It is a longstanding audit client of your firm and since September 2006 it has increased its level of operations significantly, having recently opened a second factory in order to meet production demand. As a consequence of the growth in operations, the company’s internal control system and control activities have changed as compared to the previous year. The company relies on a year end inventory count as a basis for valuing inventories for inclusion in its financial statements. It also uses a bank overdraft facility which is secured on its assets. Your audit manager has asked you to suggest the general planning matters, together with any special matters in the case of Palm Co, that should be considered when planning the audit of the company’s financial statements for the year ending 31 August 2007. He has also asked you to consider the various methods by which your firm can record the company’s system of internal control, and also to consider how your firm may use Internal Control Questionnaires (ICQs) and Internal Control Evaluation Questionnaires (ICEQs) in the audit process. Required: (a) Identify and explain FOUR matters that your audit firm should consider when planning the audit of the financial statements of Palm Co for the year ending 31 August 2007. Note: Your answer should include matters specific to the company as well as general matters. (b) State THREE methods by which your firm may record the internal control system of Palm Co. (10 marks) (3 marks) (c) Explain how an Internal Control Questionnaire (ICQ) differs in nature and design from an Internal Control Evaluation Questionnaire (ICEQ). (6 marks) (d) List FOUR key questions that should be included on an ICEQ relating to the purchases and trade payables system of Palm Co. (6 marks) (25 marks) 7J–INTAC Paper T8INT 3 Ash Co is a small engineering company with 14 employees and has recently appointed your firm as its auditors. You attended the company’s year end inventory count on 31 May 2007 and ascertained that the company had a material amount of work-in-progress. Now, you are preparing to carry out the detailed audit work on the company’s financial statements to 31 May 2007. Two junior members of the audit team have asked you to explain the process for obtaining audit evidence. They are aware of ISA 500 Audit Evidence, and want to know the factors that will influence your firm’s judgement in deciding what will be sufficient appropriate evidence when auditing the financial statements of Ash Co. They are also unsure about the specific procedures your firm will use to obtain audit evidence. Required: (a) State THREE factors that generally influence an auditor’s judgement in deciding what will be sufficient appropriate evidence, commenting on their relevance to your firm’s audit of Ash Co. (6 marks) (b) Describe each of the procedures listed below, used to obtain audit evidence, and for each procedure give TWO examples of when it may be used during the audit of the financial statements of Ash Co. (i) Observation; (4 marks) (5 marks) (5 marks) (5 marks) (25 marks) (ii) Inquiry; (iii) Confirmation; (iv) Reperformance. 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com [P.T.O. including a letter of engagement and auditors’ rights were discussed.blogspot.7J–INTAD Paper T8INT 4 Beech Co is a computer software design company. an audit firm. (3 marks) (5 marks) (ii) State FIVE important matters that should be included in a letter of engagement. Its directors recently approached the audit engagement partner of Oaks & Co. At a brief meeting between the directors and the partner.com . Required: (a) (i) Explain the purpose of carrying out client screening procedures. (9 marks) (b) (i) Explain the purpose of a letter of engagement. (c) State the rights that the new auditors of Beech Co should have with regard to: (i) Access to records. the formalities of the audit appointment process. (4 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (ii) Information and explanations. to appoint the firm as the company’s new auditors. (4 marks) (ii) State SIX matters that the audit engagement partner of Oaks & Co should consider when screening Beech Co. The partner is now about to commence his client screening procedures with regard to Beech Co. com .Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. there is likely to be a disciplined and structured approach to performing day to day administrative and accounting tasks. price. (2) All orders should be supported by official. In addition to reflecting the function and operating style of the directors and managers. provided the results from tests of controls we carry out show that controls employed do meet desired objectives. awareness and actions of the directors and managers of an entity concerning the entity’s internal controls and its importance in the entity. including recruitment. quality and condition by appropriately experienced staff. details of goods received and should be signed as approved by the inspection personnel. Goods received notes should then be forwarded to the accounts department for subsequent matching to purchase orders and supplier invoices. Goods and services are procured at the best possible price on the best possible terms. the purchase order number. the control environment of an entity is also reflected in: – – – – its personnel policies and procedures. to ensure that unauthorised orders are not placed with suppliers. (b) The objectives of the internal controls that should be exercised over a purchases and trade payables system are to ensure that: (i) (ii) Goods and services are procured in a timely manner. A copy of each goods received note issued. Orders should be forwarded directly from the purchasing department to suppliers with a copy being retained and further copies being forwarded to Olive Co’s goods received area and accounts department. should be retained in sequential order in the goods received area for reference. (3) Goods accepted should be recorded on securely stored pre-numbered. delivery address. for any reason to suppliers. Conversely an entity with a weak control environment is more likely to be less effective in performing such tasks. 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. awaiting delivery of goods. we should be able to accept a higher level of detection of risk and thus carry out a reduced level of substantive procedures. (Full marks will be awarded to answers including points similar to the above or other relevant points). Consequently. Control activities should exist as follows: (i) Ordering of electrical goods (1) Goods should be ordered only by responsible officers in the company’s purchasing department. description of goods and quantity. expected delivery date. (3) Purchase orders raised should provide full order details including the date of the order. supplier name and address. For example in an entity with a good control environment. pre-numbered multipart. should be employed to control the return of goods. These should indicate the date of receipt. my firm should be able to place more reliance on the internal controls of the company. including the use of multi-part goods returned note stationery. The control environment influences the day to day activities of an entity. and should be inspected for quantity.blogspot. (ii) Receipt of electrical goods (1) Copy of the purchase orders received in the goods received area from the purchasing department. (4) Separate procedures. should be filed in numerical sequence. company purchase order stationery raised and authorised in the purchasing department. These should be reviewed regularly and any orders on which there appear to be undue delays in delivery should be referred back to the purchasing department for follow up with suppliers. where management take an active role in maintaining efficient internal controls. 7J–INTAA Paper T8INT (Full marks will be awarded to answers including points similar to above or other relevant points) (ii) The existence of a strong control environment in Olive Co should have a positive effect on our approach to the audit of the company’s financial statements. from suppliers who have been authorised to supply Olive Co by the purchasing manager. Strict physical control should be maintained over this stationery. (iv) Invoices are accepted only for goods and services received for the benefit of the entity. (v) (c) All liabilities pertaining to goods and services received are properly recorded in the accounting records of the entity. The company should ensure that each responsible officer’s purchasing authority is appropriate given the level of their experience and qualifications. than would be the case if the control environment was weak. (2) Goods delivered should only be accepted against authorised purchase orders. and the authorising signature of the responsible officer.com . In assessing the risk of material misstatement in the financial statements. methods of assigning authority and responsibility.7J–INTIX Paper T8INT ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) 1 (a) (i) June 2007 Answers The term ‘control environment’ refers to the overall attitude. by the inspection personnel. retention and dismissal. multi-part goods received notes. general ledger code posting reference. the segregation of duties in the performance of tasks. (iii) Goods and services received in inferior condition or of inferior quality are rejected or are accepted on negotiated terms. the existence of an internal audit function. record and evaluate the company’s new internal control system will also need to be considered. The register should be subsequently updated to indicate the whereabouts of the invoices in the system. Palm Co’s manufacturing activities are likely to be subject to stringent legislative requirements including health and safety regulations. Similarly management may update us with the outcome of discussions they may have recently had to renew the company’s overdraft facility. 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. For example a build up of longstanding trade receivables balances could indicate the existence of bad debts not recognised by Palm Co. (vi) Changes in legislation or accountancy practice. the date draft financial statements will be available for audit and the date by which the company requires us to issue our audit report. This should include dates for inventory count attendance. the provision of them should save time freeing audit resources to concentrate on more complex tasks. (ii) (iii) Timing requirements. or which relate only to partially completed orders. high inherent risk areas from the previous year are likely to present similar risk profiles this year. should be highlighted as such by accounts personnel prior to being forwarded to the purchasing department. Authorised invoices should then be returned to the accounts department to be prepared for batch processing. For example. The requirement to ascertain. where appropriate. Major changes in the company’s operations. to ensure that the company’s financial reporting function accords with the relevant contemporary accounting standards. (5) Matched invoices received by the purchasing department. This official should not have had any direct involvement in the ordering process. prior to detailed checking procedures. prior to being forwarded to the purchasing department for authorisation. (v) Problems encountered during the year. (vii) Work to be carried out by the client’s staff. in order to gain an insight into Palm Co’s performance and any matters arising which could have audit significance. For example. together with the change in the internal control system will have a major impact on audit planning. We should meet senior management of Palm Co to identify and discuss any problems encountered by the company during the year which could impact on our audit work. the issue of authorised internal debit notes to supplier accounts – thus minimising the possibility of erroneous payments.com . Whilst we will still need to carry out specific procedures to verify information on such schedules. should be checked to underlying documentation including the appropriate general ledger posting code and any discrepancies should be resolved prior to authorisation for payment by a responsible senior official. (Full marks will be awarded to answers including points similar to the above or other relevant points) 7J–INTAB Paper T8INT 2 (a) The following matters should be considered when planning the audit of Palm Co’s financial statements for the year ending 31 August 2007. discussions may reveal significant repairs and maintenance expenditure was incurred following the continual breakdown of old plant and machinery. Our firm should review a copy of any accounts already prepared during the year to date. The significant growth experienced by Palm Co. In order to determine the extent of assistance our firm can expect to receive from the staff at Palm Co. we should liaise with the company’s management. (6) The supplier invoice register. A review of the previous year’s working papers should indicate any audit matters arising that are likely to impact on this year’s audit. Our planning procedures should include the issue of a timetable for our work. (iv) A review of interim or management accounts prepared by the company. Similarly the financial complexities involved in the day to day operations of the company are likely to require careful monitoring. The timetable should set out the agreed dates of our attending the company to carry out our work. by accounting personnel. Involvement of Palm Co’s staff in preparing/supplying reconciliation and analysis schedules (for example ageing of trade receivable balances). We will need to liaise with the company’s management to prepare a timetable for the completion of our audit.blogspot. should facilitate a more efficient audit. My firm should consider any recent changes in legislation or accounting practice relevant to Palm Co. (i) Specific issues arising from the previous year’s audit. agreed by the directors of Palm Co. As a consequence my firm will need to consider the additional audit resources required to carry out an efficient and effective audit on a company with a larger scale of operations. unmatched order file and unmatched goods received role file in the accounts department should be regularly reviewed by a responsible official and any undue delays in processing should be followed up.7J–INTAA Paper T8INT (iii) Receipt and authorisation of supplier electrical goods invoices prior to batch processing (1) All invoices received by Olive Co should be forwarded to the accounts department and logged in an invoice register as received. (2) Invoices should then be matched with and checked against numerically filed copy purchase orders and goods received notes. (3) Invoices relating to goods received and retained but on which there appear to be discrepancies (for example casting errors). (4) Invoices relating to goods that have been returned should be subject to separate control procedures including. Key questions are phrased such that answers in the positive should alert the auditor to the fact that there are deficiencies in the systems because systems objectives are not being met. ensuring there is an adequate balance between the number of employees to be assigned to the audit. from a manager of Ash Co. of the company’s control environment and of its internal control system. My firm should give careful consideration to the make up of the audit team. ICEQs are usually designed to include a list of points that the auditor should consider before answering each key question. in determining the likelihood of recovering a long standing debt from a customer. This will be governed by the source and reliability of it. (iv) The persuasiveness of audit evidence obtained. (c) An Internal Control Questionnaire (ICQ) normally comprises a checklist of standard controls that should exist in a specified functional area (for example sales and trade receivables or purchases and trade payables). (ii) (iii) The nature and materiality of the item being tested. that the debt is recoverable.(viii) Audit staffing. (b) My firm may record the internal control system of Palm Co by employing any of the following methods: (i) (ii) Narrative Notes Flow Charts 7J–INTAB Paper T8INT (iii) Internal Control Questionnaires or check lists (iv) Organisation Charts (Full marks will be awarded for stating any THREE of the above). Questions about the existence of specified controls are usually phrased to generate a ‘Yes’ or a ‘No’ answer. it is likely that we will need more evidence to arrive at our audit conclusion than we would otherwise need for a similar longstanding audit client. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. In such circumstances we would need to obtain additional audit evidence from extended substantive procedures. correspondence from the customer or legal representatives) than on an optimistic assertion. a substantial amount of audit evidence will probably be required to support the valuation. 7J–INTAC Paper T8INT 3 (a) The following factors will influence my firm’s judgement in deciding what will be sufficient appropriate evidence when auditing the financial statements of Ash Co. (i) Knowledge of the company and the business environment in which it operates. As Ash Co is a new audit client. their experience and the fee chargeable to Palm Co for carrying out the audit work.blogspot. they do not provide evaluation of those weaknesses. the valuation of work-inprogress held by Ash Co at 31 May 2007 is complex because it should include an appropriate amount of overhead cost. For example. with an affirmative answer confirming the existence of the control and a negative answer indicating the absence of the control and a weakness in the system. Generally the more complex and material an item is. The assessment of audit risk. (d) The following key questions should be included on an ICEQ relating to the purchases and trade payables system: (i) (ii) Can liabilities be recorded for goods or services not received by the company? Can unauthorised goods be ordered? (iii) Can unauthorised goods be accepted? (iv) Can liabilities be incurred but not recorded? (v) Can liabilities be over or understated? (vi) Can trade payable accounts be improperly debited or credited? (vii) Can unsupported payments be made to suppliers? (viii) Can charges be allocated to the incorrect general ledger account? (Full marks will be awarded for listing FOUR of the above or other relevant questions). by asking key questions about those systems. A problem associated with ICQs is that whilst they do identify areas where controls appear to be weak. Given that the work-in-progress value is also material. given the low number of employees it is likely that there is a lack of segregation of duties in its accounting system. However. When assigning audit staff. staff availability and work experience training issues. (Full marks will be awarded for identifying any FOUR of the above or other relevant matters).g. For example. Ash Co is a small company and possibly has elements of a strong control environment. Internal Evaluation Questionnaires (ICEQs) provide an alternative and improved means of evaluating control systems. whilst a ‘No’ answer may indicate weakness in controls.com . it is possible that other controls in the system. due consideration should be given to other commitments within the firm. then the more evidence will be required to arrive at an audit conclusion in respect of that item. For example. This will depend on our evaluation of inherent risk factors. may compensate for the weakness. of which the auditor is unaware. my firm will place more reliance on documentation relating to the debt (e. in respect of whom we had built up a cumulative knowledge base. Examples Reperforming the extraction of a trial balance from the company’s general ledger. Writing to the company’s legal advisers to determine the existence of any legal claims outstanding against Ash Co.blogspot.7J–INTAC Paper T8INT (v) Findings from audit procedures. Examples Writing a letter to Ash Co’s bank to obtain confirmation of the company’s bank account balances at the balance sheet date. The availability of adequate audit resources within the firm to carry out an effective audit on Beech Co’s financial statements. When a client is deemed to represent a high audit risk to the firm. The directors’ understanding of the role of the external auditor. which is a specific type of inquiry. throughout the entity or outside the entity. The accounting policies used by Beech Co. If our audit work. (iv) Reperformance Reperformance is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control. (ii) The audit engagement partner of Oaks & Co should consider the following matters: – – – – – – – – – The state of the computer software design commercial sector and prospects for businesses engaged in it. Examples Watching the opening of the mail to ensure that there is adequate control over ‘money’ payments received through the post. we may conclude that extensive substantive procedures are required in order to reduce audit risk. is the process of obtaining a representation of information or of an existing condition directly from a third party. The current operating and financial position of the company. then the firm should decline the appointment. (ii) Inquiry Inquiry consists of seeking information of knowledgeable persons both financial and non-financial. Watching Ash Co’s physical inventory count to ensure that proper control and counting procedures are being followed.com . Examples Speaking to the directors of Ash Co to obtain information about the company’s depreciation policy. (Full marks will be awarded for providing examples as above or any other relevant examples). Indications that Beech Co or its management may be engaged in fraudulent activity. Following the procedures. the firm should carefully consider the implications arising should it fail in meeting its objective of giving an accurate audit opinion. If the firm is not confident that the benefit to be derived from accepting the appointment outweighs the potential risks (including financial and reputational risk of being sued). in arriving at the decision as to whether to accept an audit appointment the firm should evaluate the potential risk to the firm of acceptance. The extent to which previous years’ audit reports relating to Beech Co have been qualified. (iii) Confirmation Confirmation. Circularisation of a sample of Ash Co’s suppliers during the period to confirm the existence of trade payables balances at the balance sheet date. Using computer assisted audit techniques to re-perform the ageing of accounts receivable balances. with regard to Ash Co reveals fraudulent activity or extensive errors and omissions with regard to the accounting records. The reason for the resignation/removal of the company’s previous auditor. (b) (i) Observation Observation consists of looking at a process or procedure being performed by others. (Full marks will be awarded for stating SIX of the above or other relevant matters). (Full marks will be awarded for stating any THREE of the above or other relevant factors). The experience and qualifications of the company’s management and their attitude towards control environment issues. 7J–INTAD Paper T8INT 4 (a) (i) The purpose of client screening procedures is to determine whether the prospective client is suitable for the firm. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. 7J–INTAA Paper T8INT (b) (i) A letter of engagement helps to avoid misunderstandings between the auditors and client as to the nature of the auditors’ appointment. – The fact that because of the test nature and other inherent limitations of internal controls.blogspot. records. – Unrestricted access to whatever records. documentation and other information requested in connection with the audit. there is an unavoidable risk that material misstatements may remain undiscovered. accounts and documents of the company. – The scope of the audit. – Basis on which fees are computed and any billing arrangements. – Request for the client to confirm the terms of engagement by acknowledging receipt of the letter. It forms the basis of the contract between the auditors and the client. (ii) (c) The new auditors of Beech Co will have the following rights with regard to: (i) (ii) Access to Records A right of access at all times to the books. including reference to applicable legislation.com . or pronouncement of professional bodies to which the auditor adheres. Information and explanations A right to require from the company’s officers such information and explanations as they think necessary for the performance of their duties as auditors. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The following important matters should be included in a letter of engagement: – The objective of the audit of financial statements. the scope of the audit work to be carried out and the respective responsibilities of the auditors and the client. regulations. (Full marks will be awarded for stating any FIVE of the above matters). – Expectation of receiving from management written confirmation concerning representations made in connection with the audit. – Arrangements regarding the planning and performance of the audit. – Management’s responsibility for the financial statements. – The form of any reports or other communication of results of the engagement. – Description of any other letters or reports the auditor expects to issue to the client. The majority of the questions require several points to be included within the answer. Generally 1/2 mark for identifying each specific matter and up to 2 marks for explanation thereof up to a maximum of (10 marks) Stating three methods by which firm may record the internal control system of Palm Co. Generally 1 mark per point. and the marks adjusted to ensure that the total awarded is fair. Generally 1 mark per objective up to a maximum of (3 marks) (c) Stating the control activities that should exist over the specified parts of Olive Co purchases and trade payables system. Generally up to 11/2 marks per question up to a maximum of (6 marks) (Total 25 marks) (6 marks) (3 marks) (b) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. and their overall mark should be lower than a candidate who provides a range of points. so if a candidate concentrates on a few points then they should not be given as much recognition. if only a brief explanation is given then it may only be worth 1/2 mark whilst a detailed discussion could be worth up to a maximum of 2 marks.blogspot. up to a maximum of 6 marks for each specified part up to an overall maximum of (12 marks) (Total 25 marks) Palm Co 2 (a) Identifying and explaining four matters that should be considered when planning the audit of the financial statements of Palm Co for the year ending 31 August 2007. it is important that the overall standard of the candidate’s answers is considered in terms of whether it is above or below a pass grade. Generally 1 mark per point up to a maximum of (ii) Describing the effect that a strong control environment in Olive Co should have on my firm’s audit approach. Olive Co 1 (a) (i) Explanation of the term control environment. if it is below a pass standard then it should be awarded less than 40%. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Generally up to 1 mark per point up to a maximum of (d) Listing four key questions that should be included on an ICEQ. the candidate should be given full credit for such points. In conclusion. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. After marking each question.7J–INTMS Paper T8INT ACCA Certified Accounting Technician Examination – Paper T8(INT) Implementing Audit Procedures (International Stream) June 2007 Marking Scheme The marking scheme generally indicates that up to 2 marks may be awarded for relevant points. Generally up to 1 mark per method up to a maximum of (c) Explanation of how an ICQ differs in nature and design from an ICEQ. If the answer is of a pass standard then it should be awarded a minimum of 40%.com . for example. the total mark awarded should be evaluated to assess whether it is fair. Consideration should be given to the depth and relevance given by each candidate when answering the question. Generally up to 1 mark per point up to a maximum of (b) (5 marks) (5 marks) Stating three objectives of the internal control that should be exercised over a purchases and trade payables system. blogspot. Reperformance Up to 1 mark per point up to a maximum of 2 marks for each procedure with overall maximum of (6 marks) (1 mark) (3 marks) (3 marks) Providing two examples of when each of the above procedures may be used during the audit of the financial statements of Ash Co. Generally up to 1 mark per point up to a maximum of (ii) Stating six matters that the audit engagement partner should consider when screening Beech Co. Generally up to 11/2 marks per example up to a maximum of (b) (i) Explaining the purpose of a letter of engagement. Confirmation. Generally up to 11/2 marks per example up to a maximum of (11/2 × 8)) (12 marks) (Total 25 marks) Beech Co 4 (a) (i) Explaining the purpose of carrying out client screening procedures. Generally up to 1 mark per point up to a maximum of (ii) Stating five important matters that should be included in a letter of engagement. Generally up to 1 mark per point up to a maximum of (c) Stating the rights that the new auditors of Beech Co should have with regard to: (i) (ii) Access to records – up to Information and explanations – up to (2 marks) (2 marks) (Total 25 marks) (5 marks) (3 marks) (9 marks) (4 marks) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. For stating relevant factor.7J–INTMS Paper T8INT Ash Co 3 (a) Stating three factors that generally influence an auditor’s judgement in deciding what will be sufficient appropriate evidence and commenting on their relevance to Ash Co.com . Generally up to 1 mark per point up to a maximum of (b) Description of each of the following procedures. generally 1 mark per factor up to a maximum of For stating relevance to Ash Co of each factor. used to obtain audit evidence: Observation Up to Inquiry. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.Certified Accounting Technician Examination Advanced Level Implementing Audit Procedures (International Stream) Monday 10 December 2007 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper until instructed by the supervisor. The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com Paper T8 (INT) .blogspot. including inventory records. The company has been using a system of continuous inventory checking (also known as a ‘perpetual inventory system’) as a means of control. (9 marks) (d) (i) Define the term ‘cost’ as applied to inventory. (2 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.ALL FOUR questions are compulsory and MUST be attempted 1 Starling Co manufactures a range of vacuum cleaners. if it is to be relied upon by the company’s auditors. Required: (a) State FIVE objectives of the internal controls that should be exercised over inventory. stopped production due to the shortage of parts and incorrect valuation of inventory. as a basis for valuing inventory for inclusion in the company’s annual financial statements. (5 marks) (b) State FIVE procedures that Starling Co will need to incorporate in its revised continuous inventory checking system. The directors have also agreed to seek advice from your audit firm in connection with the introduction of a satisfactory system of continuous inventory checking to be introduced from February 2008 and also in connection with the valuation of inventory.blogspot. (2 marks) (2 marks) (ii) Define the term ‘net realisable value’ as applied to inventory. (5 marks) (c) Describe SIX matters that should be covered by the physical inventory count instructions to facilitate an efficient and reliable count as at 31 January 2008. Consequently they have agreed that company employees will carry out a physical inventory count as at 31 January 2008. It has a stores area from which raw materials and parts are issued to production. (iii) State how Starling Co should value its inventory as at 31 January 2008 in accordance with IAS2 Inventories. and a finished goods store. but the directors recognise that the system has failed during the current year.com . In recent months the company has encountered severe difficulties in controlling its inventory resulting in losses. operates from large factory premises and prepares its annual financial statements to 31 January. com [P. Required: (a) Explain the meaning of the term ‘inherent risk’. The company owns all of the hotels’ land and buildings. (7) Each hotel offers restaurant. .O. (6) Independent contractors were employed to construct a new hotel on land already owned by the company. food poisoning at one of the company’s largest hotels resulted in hospital admission for eight of the hotel’s customers. (4) The company operates a cash or bank card payment policy for non-corporate customers with credit terms being offered only to corporate customers. The following information relates to the company’s operations during the year ended 30 November 2007. The new managing director has extensive experience of working in the hotel sector and adopts an aggressive management style whilst the new financial director is an unqualified accountant with only limited experience in the hotel sector. maintenance and replacement programmes for furnishings and equipment. trade payables and trade receivables ledgers. (8) In keeping with the company policy. (1) Following career moves by the ex-managing director and the ex-financial director. The directors of Finch Co have received legal advice confirming that the company is likely to have to pay compensation to settle the legal claims that have been lodged against it in this regard.2 Finch Co operates eight hotels in various locations around the country. all hotels are furnished and equipped similarly with ongoing repairs. (5) The remuneration package of each of the company’s directors provides for the payment of a bonus based on the profits of the company. (2 marks) (b) State with reasons FIVE factors that would affect the initial assessment of the inherent risk associated with the audit of the financial statements of Finch Co for the year ended 30 November 2007. The new financial director has changed some of the general controls of the system including those relating to the use of the remote terminals. (4 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. two replacement directors were appointed in February 2007. which comprises fully integrated general. gym. (9) In September 2007. (3) The company’s accounting system. Similarly. (4 marks) (d) State FOUR general controls that should exist to prevent unauthorised access to Finch Co’s computer system from the remote terminals located at each hotel. During the year. (2) The company’s directors. Accounts staff at each hotel deposit hotel takings into the company’s bank account at their local branch of the bank. conference and meeting facilities.blogspot. for transfer to a secure central computer based in the head office accounts department. whilst a swimming pool was constructed at another. central administration and accounts department are located at its head office premises and wages payments to all employees together with all company supplier payments are made from there.T. Work commenced in January 2007 and the new hotel began trading in November 2007. two of the hotels were extended substantially to create additional restaurant space. relies on daily sales and accounting information being input into remote terminals at each hotel. the remuneration package of each hotel general manager provides for a bonus based on the profits of their hotel. (15 marks) (c) Explain what is meant by the term ‘general controls’ as applied to a computer-based accounting system and state the objectives of such controls. (5 marks) (d) Comment on the reliability of supplier statements as a source of audit evidence and state FOUR audit objectives of your firm checking a sample of Owl Co’s year-end supplier statement balances. (3) Throughout the year the company’s cashier has been responsible for bank payments. You have been assigned to the audit of the company’s financial statements for the year ended 30 November 2007 and are aware that: (1) In May 2007 the company disposed of a large lathe machine for $30. (6 marks) (c) Explain the extent of the substantive procedures your firm should carry out in the bank area of Owl Co. (4) Your firm’s audit procedures will include checking a sample of Owl Co’s year-end supplier statement balances. (5 marks) (25 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (2) The company’s trade receivables ledger included several customers. Required: (a) (i) Describe THREE audit tests your firm should carry out with regard to the disposal of the lathe machine. The company maintains a general ledger. It also maintains a non-current assets register.000 and replaced it by purchasing two small but costly machines. (ii) Describe THREE audit tests that should be carried out with regard to the purchase of the two additional machines. (9 marks) (b) State FOUR possible causes as to why the credit balances could have arisen on customer accounts within the trade receivables ledger of Owl Co as at 30 November 2007.blogspot. with large credit balances on their accounts as at 30 November 2007. As the cashier is a very trusted employee the company’s directors expect your firm to restrict its audit procedures in this area. a small precision engineering company which makes parts for car engines. the receipt and banking of trade receivables monies and the recording of all bank transactions in the company’s accounting records.3 Your firm is the auditor of Owl Co. together with trade receivables and trade payables ledgers.com . (4 marks) (b) When carrying out audit sampling auditors need to consider whether to use statistical sampling.com . and in many firms working papers on the current audit file are automated.blogspot. Required: (i) State with reasons whether the auditor should accept the appointment as auditor to Eagle Co. (4 marks) (ii) State with reasons whether the auditor should accept the offer of free holiday accommodation from Robin Co. (6 marks) (3 marks) (25 marks) (ii) State THREE advantages of using automated working papers. (2 marks) (ii) State FOUR advantages of using statistical sampling rather than non-statistical sampling (judgemental sampling).800 and the auditor is unsure whether to accept the offer. End of Question Paper 5 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. a company which rents out holiday cottages. which would normally cost $1. Required: (i) Define the term ‘audit sampling’. Required: (i) List SIX examples of the working papers ordinarily contained in a current audit file.4 (a) At a recent seminar on audit independence. He is also the auditor of Robin Co. (6 marks) (c) For recurring audits it is advisable to split working papers between permanent and current audit files. an auditor and ACCA member explained that his sister owned all of the share capital in Eagle Co and asked whether he should accept the appointment as auditor of the company. The company has offered him free use of a cottage for a two-week period. blogspot.Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) 1 (a) December 2007 Answers The objectives of the internal controls that should be exercised over inventory, including inventory records are to ensure that: (i) (ii) Inventory records only include items that belong to the entity. Inventory records only include items that exist. (iii) Inventory records only include items that are held by the entity. (iv) Inventory records are accurate. (v) All movements of inventory are recorded. (vi) Inventory is stored safely and securely. (vii) Inventory is valued correctly. (viii) Inventory quantities are maintained at efficient and economic levels. (Full marks will be awarded for stating five of the above or other objectives.) (b) In order that the company’s auditors may rely on the company’s revised continuous inventory checking system Starling Co should ensure that: (i) (ii) Inventory records are kept up to date. All inventory lines are counted at least once a year with higher value and desirable lines being counted more frequently. (iii) The counting of inventory is carried out by suitably experienced independent individuals in a systematic and orderly manner. (iv) All corrections to inventory records are authorised by a responsible official of the company. (v) Any material discrepancies noted between inventory records and physical quantities are investigated immediately and reported to management for immediate further follow up as appropriate. (vi) There are satisfactory procedures with regard to cut-off and receipt/issue documentation at the time of inventory counts. (c) The following matters should be covered in the instructions for the physical inventory count of Starling Co as at 31 January 2008: (i) (ii) There should be adequate supervisory controls, with one individual assuming overall responsibility for the inventory count. Employees involved in the inventory count should be independent of those working in the stores and production areas, and counters should work in pairs with one counting inventory and the other recording and checking quantities counted. (iii) Procedures should ensure that items are marked or tagged as ‘counted’ to avoid the possibility of double counting or omission. (iv) There should be adequate control over the issue and returning of inventory control sheets, possibly involving the use of pre-numbered sheets with returned sheets being agreed to issued sequences for completeness. (v) Inventory sheets should be completed in ink and signed by the relevant individuals involved in the counting and recording process. (vi) Movement of inventory during the count should be prohibited and a special quarantine area should be created in which to store any goods received. (vii) In order to minimise disruption to the production process, raw materials together with parts and finished goods inventories should be counted first with work-in-progress inventory being counted at the end of the working day. (viii) There should be stringent controls over cut-off issues with careful note being made of the number of the last goods received, goods returned and goods despatched and raw materials/parts issued notes prior to the inventory count. (ix) There should be adequate procedures to identify, count and record inventory that is slow moving or obsolete. (Full marks will be awarded for stating six of the above or other relevant matters.) (d) (i) (ii) Cost is defined as being that expenditure which has been incurred in the normal course of business in bringing the inventory to its present location and condition. Net realisable value is defined as the actual or estimated selling price (net of trade but before settlement discounts) less: – – All further costs to completion All costs to be incurred in marketing, selling and distribution. (iii) Starling Co should value its inventory at the lower of cost and net realisable value of the separate items of inventory or groups of similar items. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com 2 (a) Inherent risk is the susceptibility of a financial statement assertion to a misstatement which could be material, individually or where aggregated with other misstatements, assuming that there were no related internal controls. The factors that would affect the initial assessment of the inherent risk include: (i) the geographic spread of the hotels operated by the company. The fact that each hotel has several income streams, in addition to accommodation and meals, combined with obvious expenditure requirements represents an inherent risk with regard to income and expenditure misstatement. The risk is increased significantly due to the distance of each hotel from the head office and accounts department of Finch Co. the existence of cash sales. Cash is a desirable and portable asset with high inherent risk of loss due to the possibility of misappropriation by dishonest individuals. (b) (ii) (iii) the appointment of a new unqualified financial director, with only limited hotel sector experience, during the year. This could impair the preparation of the financial statements of the company due to the adoption of incorrect accounting policies or the existence of material errors in the financial statements. (iv) the combination of an experienced and aggressive managing director with a potentially weak financial director. This could lead to undue pressure and influence being placed upon the financial director, by the managing director, to treat items incorrectly in the financial statements or not to include them in order to falsely represent the financial status of the company. (v) the existence of profit related bonuses in the remuneration packages of the company’s directors and hotel general managers. This could lead individuals to overstate income, understate expenditure, or both, in order to increase reported profits for personal gain. (vi) the construction of a new hotel during the year. Such a project would involve significant levels of expenditure by the company. Inherent risk would centre around the correct disclosures in the company’s financial statements as to capital expenditure and revenue expenditure and completeness of recording of any outstanding liabilities relating to the construction. (vii) expenditure during the year on new restaurant and swimming pool facilities. Whilst the majority of this expenditure would be of a capital nature, it is likely that some would be categorised as revenue (repairs & maintenance) expenditure. There is an inherent risk that material amounts of expenditure may have been incorrectly categorised in the company’s financial statements. (viii) the existence of ongoing repairs, maintenance and replacement programmes for furnishings and equipment. As with (vii) above, inherent risk considerations will focus on the possibility that capital and revenue expenditures have been categorised incorrectly in the company’s financial statements. (ix) the existence of small valuable and desirable non-current asset items. The nature of the hotel business is such that plant and equipment items owned by the business are open to loss due to misappropriation or theft by dishonest individuals. This would represent an increased inherent risk in the area of non-current assets of the financial statements. (x) compensation claim arising from food poisoning at a company hotel. The inherent risk associated with this event is twofold. Firstly there is a risk that the provision included in the financial statements for the payment of compensation will be materially misstated. Secondly there is the risk (possibly remote) that the food poisoning event may have a catastrophic effect on the reputation of the company’s hotels generally, resulting in a downturn of activity. As such it is possible that the company was not a ‘going concern’ at the balance sheet date and there is a consequent risk that this fact is not reflected in Finch Co’s financial statements as at 30 November 2007. (c) General controls as applied to a computer-based accounting system are policies and procedures that relate to the application and support the effective functioning of applications controls by helping to ensure the continuous proper operations of information systems. Examples of such controls include those over data centres and network operations, systems software acquisition, change and maintenance, access security; and application systems acquisition, development and maintenance. The objectives of general controls are to ensure the proper development and implementation of applications, and the integrity of program and data files, and of computer operations. General controls that should exist to prevent unauthorised access to Finch Co’s computer systems from the remote terminals located at each hotel include: (i) (ii) ensuring that the facilities of each hotel terminal allow only for the forwarding of specified accounting information to the central computer system. Disallowing any access (read or amend) by hotel terminals to files held on the central computer system. (d) (iii) Restricting physical access to computer facilities by locating terminals at each hotel in a secure room. (iv) The use of passwords to ensure that only authorised employees gain access to computer facilities. (v) Rigid controls over the issue and protection of passwords. (vi) Restricting access from computer terminals to the main computer to specified times convenient to the head office accounts personnel for the receipt of information. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com (vii) The use of a log at each terminal to record the password identity of each user and the time of access. (Note: Full marks will be awarded for stating any four of the above or other relevant controls.) 3 (a) My firm should carry out the following tests: (i) Disposal (1) check authorising documentation to ensure that the disposal was appropriately authorised and for proceeds of $30,000. (2) examine the sales documentation relating to the disposal and ensure that the sale details match those in the authorising documentation. (3) check that accounting entries with regard to documentation are recorded correctly in the general ledger with credit being made to non-current assets disposal account. (4) check accounting entries in the non-current assets register and general ledger relating to disposal ensuring correct removal from non-current assets account (credit) and opposite entries in non-current assets disposal account. Also check validity of entries relating to accumulated depreciation. (5) check calculations of profit/loss on disposal and corresponding entries in income statement. (Note: Three marks will be awarded for describing any of the above or other relevant audit tests.) (ii) Additions (1) check authorising documentation to ensure that additions were appropriately authorised. (2) check cost information from purchase invoice/purchase documentation. (3) check accounting entries in non-current assets register and general ledger with regard to cost of additions. (4) check that useful life on which depreciation rates have been based is reasonable. (5) check accuracy of depreciation charge. (6) ensure existence of new machines by physically verifying at balance sheet date. (Note: Three marks will be awarded for describing any of the above or any other relevant audit tests.) (b) Possible reasons for the credit balances on customer accounts include: (i) (ii) payment being received from the customer in advance of supply being made by Owl Co. duplicated payment of an invoice from Owl Co. (iii) omission of posting of an invoice to the specified customer account. (iv) incorrect posting of an invoice from Owl Co to another customer account. (v) incorrect posting of payment received from another customer of Owl Co to the specified customer account. (vi) incorrect posting of a credit note or journal credit to the specified customer account. (vii) posting of a credit note to the specified customer account in lieu of goods paid for, being returned. (viii) posting of a credit note to the specified customer account on settlement of dispute. (Note: Full marks will be awarded for stating any four of the above or other possible causes.) (c) In order to minimise audit risk our firm should carry out extensive substantive procedures in the bank area. This is due to the high inherent risk factor associated with bank transactions and the fact that Owl Co’s internal control in this area is fundamentally weak. Irrespective of the point that the cashier may be a very trusted employee of the company: the lack of segregation of duties in the bank payments, bank receipts and recording functions is of a particular concern. The fact that these functions are not segregated, considerably increases the possibility of undetected fraud and error. Consequently, in directing additional audit resources to substantive procedures in this area, my firm would be seeking to reduce the detection risk with regard to fraud and error. Evidence obtained from Owl Co’s supplier statements is from a reliable source of audit evidence because the suppliers represent an independent source outside of Owl Co. Consequently by checking year-end supplier statement balances, my firm would seek to obtain reliable evidence in connection with the audit objectives of confirming: (i) (ii) completeness of payables – omissions from trade payable balances may become apparent following a comparison of statement balances and trade payables ledger balances. existence of trade payables balances – supported by equivalent balances on supplier statements. (d) (iii) the valuation of trade payable balances – supported by equivalent balances on supplier statements. (iv) confirmation that liabilities recorded in the trade payables ledger pertain to Owl Co – in this regard supplier statements should be addressed to the company. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Evidence that the work performed by assistants was supervised and reviewed. as compared to the sample size that would be selected using judgement sampling methodology. may compromise the auditor’s objectivity because it represents a threat to independence due to the self-interest threat.blogspot. As a consequence of this. ACCA’s Code of Ethics and Conduct sets out an auditor’s responsibility with regard to accepting an audit appointment to a company in which a member or their close family has a direct or material financial interest.) 12 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. a conclusion concerning the population. Letters of representation received from the entity. the conclusion drawn from the results of sample testing are more easily justified where an audit client disputes the audit conclusions. Copies of the financial statements and auditor’s report.) (ii) (c) (i) Examples of the working papers ordinarily contained in a typical current audit file include: – – – – – – – – – – – – – – Evidence of the planning process including audit programmes and any changes thereto. Analyses of significant ratios and trends. Evidence of the auditor’s consideration of the work of internal auditing and conclusions reached. The Code confirms gifts or hospitality should only be accepted if the value of any benefit is modest. A record of the nature. Analyses of transactions and balances. (Full marks will be awarded for stating four of the above or other advantages of using statistical sampling techniques. indicating that such an offer. The relationship between the auditor in question and his sister who owns all of the share capital in Eagle Co. Copies of communications with other auditors. The value of the free holiday accommodation offered to the auditor of Robin Co is $1. (2) bias is eliminated.800. including how exceptions and unusual matters. The advantages of using statistical sampling rather than judgemental sampling (non-statistical sampling) include: (1) the size of the sample is determined objectively having regard to the degree of risk associated with the area being tested. ACCA’s Code of Ethics and Conduct provides guidance with regard to the acceptance of an offer of gifts or hospitality from audit clients. The auditor should therefore politely refuse the offer. (Full marks will be awarded for listing six of the above or other relevant examples. and therefore the amount of audit work required.com . It therefore follows that the auditor should not accept the audit appointment. The Code confirms that in such circumstances there is a threat to the independence in terms of familiarity and that therefore such an appointment should not be accepted. with regard to their professional work. (b) (i) ‘Audit sampling’ is the application of audit procedures to less than 100% of the items within an account balance or class of transactions (a population) to enable the auditor to obtain and evaluate audit evidence about some characteristic of the item selected in order to form. if any. An indication as to who performed the audit procedures and when they were performed. disclosed by the auditor’s procedures were resolved or treated. Details of audit procedures applied regarding components whose financial statements are audited by another auditor. timing and extent of audit procedures performed in response to risks at the assertion level and the results of such procedures. Conclusions reached by the auditor concerning significant aspects of the audit. thus increasing the level of confidence in the results of testing the sample. irrespective of the company’s motivation for making the offer. experts and other third parties. (4) The emphasis on risk assessment by the auditor in the determination of the sample size encourages the auditor to concentrate on significant issues (for example a high degree of control risk). auditors must be independent and be seen to be independent at all times. This is clearly of significant value and. if it has significant value. which may not otherwise be considered. the use of statistical sampling techniques may reduce the sample size. (3) results of statistical sampling can be more easily justified as being representative of the population as a whole. (5) In instances when there is a large population. is one of a close family relationship. Copies of letters or notes concerning audit matters communicated to or discussed with management or those charged with governance. or assist in forming. and therefore does not present a threat to objectivity.4 (a) (i) Auditors must be independent and be seen to be independent at all times in connection with their professional work. The identified and assessed risks of material misstatements at the financial statement and assertion level. would represent a threat to the objectivity and independence of the auditor. including the terms of the engagement and material weaknesses in internal control. (6) The auditor may justifiably conclude with a definite level of confidence that the conclusions drawn from the sampling test is within stated precision limits. (ii) As in (i) above. com . (Full marks will be awarded for stating three of the above or other advantages. automatic updating facilities should result in time savings and audit effort. Where changes need to be made to working papers including those to summary schedules. Standard working paper stationery can be downloaded from remote locations at clients’ premises thus reducing the need to transport voluminous files and papers.) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. there is a reduced requirement for supervising visits to clients’ premises.(ii) The advantages of using automated working papers include: – – – – – Working papers should be neater thus facilitating the review process. This can result in considerable time and cost savings.blogspot. The risk of error is reduced. As completed working papers can be transmitted (for example via a modem) back to the audit office for review. for example in the casting of numeric schedules. with a maximum of (2 x 5) (10 marks) (c) Explanation of what is meant by the term ‘general controls’ as applied to a computer-based accounting system. If the answer is of a pass standard then it should be awarded a minimum of 40%. Generally up to 1 mark for identifying each factor up to a maximum of (1 x 5) (5 marks) Up to 2 marks for stating reasons why each factor would affect the initial assessment of the inherent risk associated with the audit.ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) December 2007 Marking Scheme The marking scheme generally indicates that 1 mark or 11/2 marks are awarded for each point. it is important that the overall standard of the candidate’s answer is considered in terms of whether it is above or below a pass grade. 1 (a) Stating FIVE objectives of the internal controls that should be exercised over inventory. Generally 1/2 mark per point up to a maximum of (2 marks) (Total 25 marks) 2 (a) Explanation of the term ‘inherent risk’. After marking each question.com . and their overall mark should be lower than a candidate who provides a range of points. for example if only a brief explanation is given then it may only be worth 1/2 point whilst a detailed discussion could be worth up to a maximum of 2 points. In conclusion. marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. The majority of the questions require several points to be included within the answer. Generally 1/2 mark per point up to a maximum of Stating the objectives of general controls (d) (21/2 marks) (11/2 marks) Stating FOUR general controls that should exist to prevent unauthorised access to Finch Co’s computer systems from the remote terminals located at each hotel. the total mark awarded should be evaluated to assess whether it is fair. However. and the marks adjusted to ensure that the total awarded is fair. if it is below a pass standard then it should be awarded less than 40%. Generally 1/2 mark per point up to a maximum of (2 marks) (iii) Stating how Starling Co should value its inventory as at 31 January 2008. Generally. so if a candidate concentrates on a few points then they should not be given as much recognition. Generally 1 mark per objective up to a maximum of (b) (5 marks) Stating FIVE procedures that Starling Co will need to incorporate in its revised continuous inventory checking system. Generally up to 11/2 marks per matter up to a maximum of (9 marks) (d) (i) Definition of cost. consideration should be given to the depth and relevance given by each candidate when answering the question. Generally up to 1 mark per control up to a maximum of (4 marks) (Total 25 marks) 15 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. Generally 1/2 mark per point up to a maximum of (2 marks) (ii) Definition of net realisable value. the candidate should be given full credit for such points. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. Generally 1/2 mark per point up to a maximum of (2 marks) (b) Stating with reasons FIVE factors that would affect the initial assessment of inherent risk associated with the audit of the financial statements of Finch Co for the year ended 30 November 2007. Generally up to 1 mark per procedure up to a maximum of (5 marks) (c) Describing SIX matters that should be covered by the physical inventory count instructions to facilitate an efficient and reliable count. Generally 1/2 mark per point up to a maximum of (2 marks) (2 marks) (b) (i) (ii) Definition of the term ‘audit sampling’. Stating FOUR audit objectives of checking a sample of Owl Co’s year-end supplier statements. Generally up to 1 mark per stated advantage up to a maximum of (1 x 3) (3 marks) (Total 25 marks) 16 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Mention of ACCA’s Code of Ethics and Conduct Other commentary. Generally up to 1 mark per point up to a maximum of (21/2 marks) (1 mark) (21/2 marks) (d) Brief comment on the reliability of supplier statements as a source of audit evidence. Generally 1/2 mark per point up to a maximum of (1 mark) (1 mark) (2 marks) (1 mark) (1 mark) (ii) Confirming that auditor should not accept the gift from Robin Co. Up to 1 mark for each objective up to a maximum of (1 x 4) (4 marks) (Total 25 marks) 4 (a) (i) Confirming that auditor should not accept the audit appointment to Eagle Co. Generally up to 11/2 marks per test up to a maximum of (11/2 x 6) (9 marks) (b) Stating FOUR possible causes as to why credit balances could have arisen on customer accounts.blogspot. Explaining risk associated with lack of segregation of duties Generally 1/2 mark per point up to a maximum of Explanation of other points. Generally up to 11/2 marks per stated advantage up to a maximum of (11/2 x 4) (6 marks) (c) (i) Listing SIX examples of the working papers ordinarily contained in a current audit file. Generally up to 11/2 marks per cause up to a maximum of (11/2 x 4) (6 marks) (c) Explaining with reasons the extent of substantive procedures the audit firm should carry out in the bank area of Owl Co. Generally up to 1 mark per example up to a maximum of (1 x 6) (6 marks) (ii) Stating THREE advantages of using automated working papers. Stating FOUR advantages of using statistical sampling.com . Mention of ACCA’s Code of Ethics and Conduct Other commentary.3 (a) Describing THREE audit tests with regard to the disposal of the lathe machine and THREE audit tests with regard to the purchase of the two additional machines. The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. This question paper must not be removed from the examination hall.Certified Accounting Technician Examination Advanced Level Implementing Audit Procedures (International Stream) Monday 9 June 2008 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. During reading and planning time only the question paper may be annotated.com Paper T8 (INT) . You must NOT write in your answer booklet until instructed by the supervisor.blogspot. Do NOT open this paper until instructed by the supervisor. The terminals are connected to the time recording unit. only after the production manager has confirmed that all the required amendments have been entered. After satisfactory completion. Showing relevant bank account details for each employee and payments due. including rate of pay. including those for holiday and sickness entitlements. The following controls are exercised over the system. Showing.ALL FOUR questions are compulsory and MUST be attempted 1 Peach Co is a manufacturing company employing 190 production employees. gross pay. (8) The wages manager then scrutinises all summaries for completeness and accuracy of processing and investigates any apparent discrepancies. the following printouts are provided: (i) Monthly wages summary. which produces weekly and monthly summaries of employees’ attendance records. who then passes a signed approved copy of the ‘bank credit’ payments summary to the company’s cashier. operated by employees with individual uniquely coded swipe cards. (iii) Monthly statutory deductions and other deductions summary. prior to the update and closure of the programme. (4) Employees work a standard five-day week. by employee and in total: hours paid. On the first day of their employment. all of whom are paid through the company’s monthly wages system by bank credit transfer. He then files the summaries and passes a copy of the monthly hours summary to a wages clerk for the input of hours into. (7) On completion of processing. (ii) Monthly bank credit transfer payments summary. The cashier then immediately instructs the company’s bank to make the relevant payments. (1) Potential employees are interviewed by the production manager who forwards the details of successful candidates. On a weekly basis.blogspot. amend as required and then download hard copies of the information via his desktop printer. the monthly wages programme. In this regard the company operates a swipe card time recording system. (6) The wages manager has ‘read’ and ‘download’ remote access to the data stored in the time recording unit. a wages clerk then updates and closes the wages programme. standard hours of employment and the employee’s bank details. he downloads hard copies of the weekly and monthly summaries to his desktop printer. statutory deductions. A wages clerk then immediately updates the wages master file with details of the future employee. other deductions and net pay. the job title and the rate of pay to the company’s personnel manager for an employment offer to be made. (3) Employees are paid an hourly rate on the basis of time worked. hourly rate. with regard to the recruitment and payment of employees. The time recording unit is programmed to provide a monthly summary of hours. the production manager issues a swipe card to employees and updates the time recording unit master file with the new employee details. and the running of. the personnel manager forwards written details of the employee to the wages department. Showing deductions by category and payment instruction details. (5) The production manager has ‘amend’ and ‘download’ remote access to the time recording unit enabling him to read recorded data via his desktop computer. 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . On a monthly basis. employees register their arrival and departure by swiping their card through one of ten un-monitored entry/exit terminals. All summaries are then filed chronologically by the wages manager. Each day. the production manager checks the hours worked for each employee and updates the electronic data file record for each employee with any appropriate amendments. (2) On receipt of acceptance of an employment offer. blogspot.com [P. (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (4 marks) (c) With regard to the wages system of Peach Co: (i) Identify FOUR weaknesses in the system. (5 marks) (b) State FOUR internal controls that should be exercised over the data contained in the wages master file of a company.T. (iii) Recommend improvements to address the weaknesses. .Required: (a) State FIVE objectives of the internal controls that should be exercised over a wages system. Note: you should assume that there are a sufficient number of employees at appropriate levels to operate effective controls. (4 marks) (6 marks) (6 marks) (ii) Describe the implication of each weakness identified.O. several accounts department employees will be made redundant whilst the tasks of other employees will change. Supplies are often transferred between centres to replenish low levels of fast selling inventory lines. in addition to numerous sub-contractors in this regard. that such a change would have on your firm’s audit of the company’s financial statements for the year ending 31 October 2008. The directors of Plum Co have decided to update the company’s old computer-based accounting system with a more efficient system. Its central administration and accounts departments are located at one of its garden centre sites and it prepares annual financial statements to 31 October. They are aware that your firm uses computer assisted audit techniques and that its existing audit software is compatible with the old system. (b) Explain the effect that an implementation date of 1 September 2008 for the new accounting system would have on your firm’s audit of Plum Co’s financial statements for the year ending 31 October 2008. However the directors are unsure of the effect. large quantities of plants. (11 marks) (25 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (5) Plum Co also operates as a landscape gardening contractor and employs its own workforce of 40 full-time employees. Additional product ranges comprise gardening tools and equipment. Required: Identify the inherent risks associated with ascertaining the quantity and value of inventory (including work in progress). Required: (a) (i) List and describe THREE categories of application controls over the input and processing of data. There is also a shop displaying retail products and housing the cashiering point and a busy café area. The company has an excellent reputation for the quality of its landscaping and consequently it often contracts to work on large projects of up to 18 months duration. (5 marks) (c) The following additional information is pertinent to the audit of Plum Co’s financial statements: (1) Each garden centre is open to the public throughout the year selling a comprehensive range of fertilisers.com . incorporating superior application controls over the input and processing of data. who work solely on the cultivation and maintenance of plants. to be reported in the financial statements of Plum Co for the year ending 31 October 2008. plants. a company operating three large garden centres within close proximity of each other. Consequently.2 In April 2008 your firm was appointed as auditors to Plum Co. shrubs and flowers prior to sale. The company would prefer to go ‘live’ with the new system on 1 September 2008. However. (4) At each centre there is a large uncovered compound within which plants. The company is long established. then the directors are prepared to bring forward or delay the implementation to a more convenient date. as compared to an earlier or later implementation date. garden furniture and landscaping features. (2) Supplies of goods for re-sale are procured from various suppliers. shrubs and flowers. seeds. if any. and (6 marks) (3 marks) (ii) For each application control listed provide an example of its use. shrubs and flowers are grown and displayed alongside other products. shrubs and flowers are grown within the centres. has an excellent control environment and a good system of internal controls. (3) There are three gardening assistants at each garden centre. If changing to the new system on the preferred date would have anything other than a minor impact on your firm’s audit procedures.blogspot. which should be incorporated in the new computer-based accounting system of Plum Co. 3 Pear Co is a long established building renovations company and prepares its annual financial statements to 30 April.000 relates to a legal obligation to carry out repairs to a public building damaged by employees of Pear Co when renovating an adjoining building.200 63.blogspot.000 30 April 2007 $ 18. (20 marks) (b) (i) Explain why an auditor may decide NOT to carry out a circularisation of trade payables.T.000 315. Required: (a) For each of the items set out above. together with comparatives for the previous year.com [P. and (3 marks) (ii) Identify TWO situations when such a circularisation may be deemed appropriate.900 205. The company’s reported pre-tax profit for the year ended 30 April 2008 was $990. .000 37.O.000.800 81. Item 30 April 2008 $ 56.000 – Irrecoverable Debts Trade Payables Accruals Provision The provision of $81. list FIVE substantive procedures that the auditor of Pear Co should carry out to verify the completeness and valuation assertions contained in the financial statements of Pear Co for the year ended 30 April 2008. The financial statements for the year ended 30 April 2008 revealed the following items. (2 marks) (25 marks) 5 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. 4 (a) Review procedures form an important part of the audit process and audit firms may employ more than one method of review. state when and by whom it should be carried out and state what should be gained from a thorough review. These include: (1) Materiality (2) Generally Accepted Accounting Principles and International Financial Reporting Standards (3) Objectivity (4) Disclosure. Review types include: (1) ‘Hot’ Reviews (2) ‘Cold’ Reviews. in its report on the financial statements of a company. Required: Describe the circumstances. when due to disagreement. (9 marks) (c) When an audit firm is in disagreement with management and is therefore unable to express an unqualified opinion as to whether the financial statements of a company give a true and fair view.com . (ii) an adverse opinion. (5 marks) (ii) For each of the review types listed above. explain its relevance to the auditor when determining whether the financial statements of a company give a true and fair view. an auditor should consider various factors. Required: For THREE of the factors listed above. (6 marks) (b) When determining whether the financial statements of a company give a ‘true and fair view’. Required: (i) Explain the purpose of an audit review.blogspot. it may opt to express a qualified opinion or an adverse opinion in its report on the financial statements. an audit firm should express: (i) a qualified opinion. (5 marks) (25 marks) End of Question Paper 6 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com . wages are paid only for work done. wages payments are correctly calculated. (4) Weakness The production manager issues time recording swipe cards to new employees. Procedures should ensure that ‘starters’ and ‘leavers’ details are added to or deleted from the master file immediately after starting or leaving the company’s employment. and regularly checked against rates of pay existing on the master file. (3) Weakness The wages master file is updated prior to an employee commencing employment with the company. Implication There is an increased possibility that unauthorised wages could be paid to employees. hours worked or other agreed criteria. Implication A clerk could be tempted to manipulate data on the wages master file such that they. Recommendation Employees should be interviewed by the production manager and a responsible personnel official. Recommendation New employee details should be entered on to the master file on a timely basis. June 2008 Answers (Full marks will be awarded for stating any five of the of the above or other appropriate objectives) (b) The following controls should be exercised over the data in the wages master file: (i) (ii) (iii) (iv) (v) (vi) Segregation of duties should ensure that individuals responsible for the updating of the file should not be involved in the processing or payment of wages.blogspot. An independent log of the number of authorised production employees should be maintained by a senior responsible official (for example – the company accountant). a wages clerk could enter details for a non-existent employee or increase the pay rate for a specified employee. wages are paid only at authorised rates of pay.ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) 1 (a) Internal controls exercised over wages should ensure that: (i) (ii) (iii) (iv) (v) (vi) (vii) wages are paid only to genuine employees. This should regularly be reviewed by a senior responsible official of the company. all payments are made on a timely basis. have ‘amend’ access to the wages master file. Controls should include a computer log which registers date and time access to the master file by the various users. (vii) (viii) (Full marks will be awarded for stating four of the above or other appropriate controls) (c) (1) Weakness The production manager has sole responsibility for recruiting employees to Peach Co. (2) Weakness Wages clerks.com . prior to commencing employment. Recommendation Wages clerks should have only ‘read’ access to the master file data. all wages transactions are correctly and promptly recorded in the accounting records. ‘Read’ access to the master file should be available from specified terminals to responsible officials who have a need and authorised cause to access the information. and to amend wage rates of employees. There should be strict authorisation procedures in place to ensure that only appropriate senior responsible officials are able to add new employees and delete existing employees. statutory and other deductions from wages are correctly calculated. or their associates are able to benefit from subsequent misappropriation of company funds. New employee details should be entered by a senior responsible official of the company or the wages manager. ‘Amend’ access to the master file should be restricted to specific senior responsible officials of the company from specified terminals. there is an increased likelihood of the misappropriation of company funds by way of wages payments for non-existent employees. Implication The manager may be tempted to introduce non-existent employees into the system leading to the misappropriation of company funds by way of wages payments for non-existent employees. and regularly checked against the number of employees existing on the master file. after employees have commenced employment with Peach Co. (See part (b) above). A confidential list of authorised rates of pay for all employees should be maintained by a senior responsible official of the company (for example – the company accountant). responsible for the processing of wages. such that potential employees can be properly identified and vetted prior to employment. such payments would be supported by apparently bona fide attendance records. Implication Given the apparent lack of accountability by the production manager over the recruitment of employees. For example. 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. the wages system should be modified or updated to ensure production of monthly exception reports. or details of starters and leavers in the month. Recommendation Amendments to data on the master file of the time recording unit should be made only by a senior responsible official of the company. weekly hours worked in excess of 60 by an employee may be outside of such parameters. For example. by for example one individual (arriving on time for work) swiping other late coming employees’ cards through a terminal. Implication Unauthorised payments made as a consequence of unauthorised working patterns or rates of pay may not be recognised. alphabetical character input would be rejected. where a date entry in numeric format is required. For example. erroneous journal entries could be made into the ledger. For example. if input of trade payables invoices are input out of sequence. Similarly. (7) Weakness The wages programme does not produce ‘exception’ reports detailing for example hours worked and payments due outside of expected ranges. as the summaries form the basis of wages posting entries into the company’s general ledger. Similarly unauthorised payments to ‘starting’ or ‘leaving’ employees may not be recognised. (5) Weakness The production manager is able to amend employee details on the time recording unit’s master file. Recommendation To facilitate ease of recognition of those payments as described (above). ensure that input data is rejected or highlighted if it is outside pre-set parameters. Queries and apparent discrepancies should be resolved. Their issue should be controlled by a senior responsible official of the company.Recommendation Stringent controls should be maintained over the issue of swipe cards to employees. and updated summaries produced before closure of the wages programme. These should be scrutinised by the wages manager and reviewed by the accountant along with other summaries as detailed (at point 8) below. For example. Recommendation Prior to the closure of the wages programme.com . The production manager should not have access to master file data. Range/Reasonable Checks Sequence Checks 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (8) Weakness The company’s bank is instructed to make payments of wages without a prior check of the wages summary by an independent responsible official. ensure that sequential input of documentation/data is maintained. Recommendation Employees’ entry/exit terminals should be monitored to reduce the temptation to falsify records and thus limit the company’s exposure to payments being made for hours not worked. ensure that input entered on documents with more than one data field is compatible. Implication Employees’ attendance records could be falsified. The accountant should review the summaries and enquire into any abnormal or irregular payments to be made. independent of the wages and production functions (for example the company accountant) and there should be measures to ensure that cards become operational only when issued. all of the monthly summaries produced should be made available to the company’s accountant. independent of the wages and production functions. (Full marks will be awarded for identifying and commenting on any four of the above or other weaknesses in the wages system) 2 (a) The following categories of application controls should be incorporated: Format Checks Compatibility/Dependence Checks ensure that data is entered in the correct form. All final summaries should be signed as checked by the accountant prior to filing. (6) Weakness The entry/exit terminals are not monitored. the unfettered authority of the production manager to change master file data on the time recording unit adds to the likelihood of fraudulent wages payments being made. Implication Notwithstanding other control measures built into the wages system. unauthorised wages payments could still be made by Peach Co. an expense invoice with an appropriate general ledger code would be rejected if it was also coded with a trade receivables ledger account code.blogspot. Implication As with (4) above. this will be highlighted at the input stage. my firm will need to invest in new software resulting in higher projected 2008 audit costs for Plum Co. whilst others may have become obsolete due to lack of demand from customers. These would include the general and application controls over the company’s computer-based accounting system.Control Totals ensures completeness of input. shrubs and flowers owned by the company. Such a system could be updated at the point of delivery and (automatically) at the point of sale. With regard to seeded. Quantifying and Valuing Work in Progress Engaging 40 full-time employees and numerous subcontractors. The directors of Plum Co should recognise the risk in being able to identify such inventory lines and the requirement to place a value on them at the lower of cost and net realisable value. (Full marks will be awarded for describing any three of the above or other appropriate controls and for providing an example) (b) An implementation date of 1 September 2008 for the new accounting system would have major impact on my firm’s audit of Plum Co’s financial statements for the year ending 31 October 2008.com . plants. where data from common documents is input in quick succession. there is a high level of inherent risk in the valuation of work in progress. shrubs and flowers. However the fact that the public do have open access to inventory lines inevitably increases the inherent risk associated with quantifying inventory. it may prove more challenging to quantify the amount of fertilisers. The combination of large contracts. It is apparent that an implementation date prior to 31 October 2008 would be problematic. For example. Given that the updated system will result in staff redundancies and a change in responsibilities for retained employees. Similarly general inventory lines held may have become tarnished because of exposure to inclement weather conditions. In the determination of cost. seeds. simultaneous operations and numerous financial transactions. including the cost of employing the gardening assistants and other associated overheads. Similarly the change from ‘old’ to ‘new’ will entail the transfer of master file and data file information to the replacement system. plants. other sales ranges and café inventory. Irrespective of the cost structures of the landscape gardening activity. shrubs and flowers (including fertilisers and seeds). these should be similarly valued at the lower of cost and net realisable value. Our procedures would be governed by the extent to which we were able to rely on the company’s system of internal controls. such that they would need to be considered when planning the work in connection with the audit of the company’s subsequent (2009) annual financial statements.blogspot. As Plum Co is a new audit client the audit resource required and cost of ascertaining. Finally. unpicked plants. involving numerous financial transactions. the company’s landscape garden contracting operations are apparently quite sizeable. will include ‘perishable’ inventory lines. Consequently there are likely to be various contracts in operation at any point in time. The company may rely on a perpetual inventory recording system as a means of monitoring inventory levels. is likely to take up some considerable time and the associated financial costs are likely to be high. Whilst it may be relatively easy to quantify the levels of the other inventories. recording and evaluating the company’s system of internal control would be quite extensive. it is apparent that there will be wholesale changes to the company’s internal control system. given that my firm’s audit software will not be compatible with the new system. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. In summary any implementation date prior to 31 October 2008 would have a negative impact on our audit of Plum Co’s financial statements for the year ending on that date. My firm will need to fulfil its obligation to evaluate the new system. However it should also be apparent that any implementation date other than 1 November 2008 would only postpone the problems detailed above. The planning and execution of this task by the company and checking (by my firm) of the transferred data. Similarly the movement of inventory between centres introduces added problems in the control and monitoring of inventory quantities. as appropriate. (Full marks will be awarded for covering any ten points mentioned above or other relevant points) (c) The following inherent risks are associated with ascertaining the quantity and the value of inventory (including work in progress): Quantifying Inventory Broadly there are three categories of inventory being. Valuing Inventory The nature of inventory held by the centres is such that at any point in time a proportion of the inventory held (including café inventory). the company would need to take account of all costs directly attributable to the plants. Any problems encountered in this regard would simply be exacerbated by an implementation date prior to 31 October 2008. The company will need to recognise its obligations to value work in progress in accordance with IAS2 Inventories. represent a large inherent risk for the company in trying to ensure that they are able to record and monitor and ascertain the amount of work they have carried out on specified contracts. ‘hash’ totals can be used as a means of control when inputting batches of trade receivable invoices. in the normal course of events.blogspot. (iii) Examine the minutes of board or management meetings to obtain substantiating evidence as to the existence and nature of the claim. Review customer correspondence files. (v) Obtain permission from the directors of Pear Co and write to the company legal advisers to confirm the likelihood of Pear Co having to settle the claim and the likely value of the claim. to compare expense heading relationships to sales or other appropriate measures for current year to those of previous year to identify possible omitted/erroneous accruals. Examine customer receipts after the reporting period and check to schedule of irrecoverable debts schedule. (iv) Scrutinise appropriate expense accounts to identify expenditures already incurred in connection with the claim and costs possibly duplicated in the final provision. Consequently. Accruals (i) (ii) Agree reported accruals value to underlying working papers/schedules. full marks will be awarded for stating any five of the above or other appropriate procedures. Use CAATs as appropriate to interrogate system for long outstanding receivable balances and unusual credit entries posted to accounts. the auditor may decide that there is little useful purpose in carrying out a trade payables circularisation. paying particular attention to known accrual expense accounts. and ensure inclusion in trade payables value. (For each financial statement item above. Check reconciliation of supplier account statements to trade payable ledger balances. prepared by Pear Co staff. (iv) Review expenditures and postings to the general ledger. (v) Use CAATs and manual procedures as appropriate. Review trade payables control account postings immediately. long outstanding balances including those with no recent activity and accounts containing unusual debit entries. ensuring that 54% increase on previous year balance makes sense taking all matters into account. (ii) Discuss the nature and amount of the claim with senior responsible officials of the company. with permission of the company. Trade Payables (i) (ii) (iii) (iv) (v) (vi) (vii) Agree reported trade payables values to trade payables control account reconciliation and underlying working papers/schedules.3 (a) Audit tests that should be carried out include the following: Irrecoverable Debts (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Agree reported irrecoverable debts value to underlying working paper schedules. prior to and post 30 April 2008 and enquire into veracity of unusual items. If appropriate. Review aged trade receivables schedule and compare recognised irrecoverable debts to this. Use CAATs as appropriate to identify for further investigation. Review cut-off procedures for goods received and recognition of amounts payable at 30 April 2008. Examine credit notes raised after the reporting period to identify any balances erroneously omitted from irrecoverable debts schedule. Review unmatched goods received notes (goods received but associated invoice not received at 30 April 2008). (vi) Identify any round sum amount accruals and make appropriate enquiries to test veracity of them. solicitors/legal correspondence and results of trade receivables circularisation – if carried out – for evidence of irrecoverable debts. Enquire into any abnormalities and carry out further reconciliations as required. after the reporting period. Confirm accuracy of aged trade receivables balance by test checking known cash receipts paid against earlier invoices raised. seek confirmation of value of claim from an independent expert. (iii) Compare budget expenditure with actual reported expenditure in income statement and enquire into whether any reported under-spend(s) could be represented by omitted/erroneous accruals. Provision (i) Read relevant correspondence (including legal correspondence) relating to the damages claim and compare the value of the claim as reported in the company income statement to underlying estimates and opinions available. provided there is sufficient appropriate audit evidence available from other sources. Carry out analytical procedures and make enquiries as appropriate. Test to ensure accuracy. to identify possibly omitted/erroneous accruals. and enquire as to underlying rationale of the sum provided. enquire into any longstanding unpaid receivables balances. Enquire into reasons for exceptional balances included in irrecoverable debts value. Carry out analytical analysis procedures and raise enquiries as appropriate ensuring that 40% decrease or previous year balance makes sense taking all matters into account. 12 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.com . (vi) Check disclosure of provision in financial statements in accordance with relevant international financial reporting standards. Marks will be awarded for detailing manual and/or computer-assisted auditing techniques) (b) (i) An auditor must achieve a balance between the requirement to obtain sufficient appropriate audit evidence and the requirement to complete the audit on a timely basis at a realistic cost. that if financial statements do not fulfil all legislative and regulatory disclosure requirements – they are unlikely to show a true and fair view. In either case a good review should ensure that adequate feedback is given so that perceived weaknesses in procedures. for example. the objectives of the audit procedures have been achieved and the conclusion expressed are consistent with the results of the work performed and support the audit opinion. they should provide full disclosure of all required information in a clear and unambiguous manner. However. In very exceptional circumstances there may be occasions when non-compliance with GAAP or IFRS. auditors need to be aware that when financial statements do not comply then they will not normally show a true and fair view. unless they have been prepared in accordance with GAAP and appropriate International Financial Reporting Standards (IFRS). A thorough review at this stage should ensure that the audit work is reviewed alongside the financial statements.Third party evidence is a good source of audit evidence and a large proportion of the documentation available when auditing trade payables is produced by third parties. and that all conclusions have been properly stated and are adequately supported. 3. Provided the auditor has sufficient confidence in the evidence otherwise available. by persons who are independent of it. will result in financial statements showing a true and fair view. suspect that fraudulent manipulation with regard to supplier payments is taking place within the company. by a more experienced member of staff. may be discussed and improved where deemed appropriate. ‘Cold’ Review This type of review involves any type of review carried out after the audit has been completed. 4. all significant matters have been resolved or are reflected in audit conclusions. In any event all work carried out should be reviewed at the final stage of the audit. the work performed and the results obtained have been adequately documented. In such circumstances a good review should ensure that adequate feedback is given to the individual(s) carrying out the work thus enabling them to make good any omissions in the procedures they have carried out. management estimates) auditors have to make a judgement on the objectivity of management in forming their opinion. 5. by the partner responsible for the audit assignment. statements and correspondence. that any risk areas identified during the audit process have been adequately covered by the audit work carried out. then (s)he may consider it unnecessary to carry out a trade payables circularisation. auditors need to be aware. suppliers’ invoices. (ii) ‘Hot’ Review This type of review involves any review of audit work carried out. based on management opinion and included in the financial statements will affect the extent to which the auditor is able to comment on the truth and fairness of those financial statements. prior to the signing of the audit report. An auditor should conclude that financial statements do not show a true and fair review if there is a material misstatement in. 2. (ii) A trade payables circularisation may however be deemed appropriate where: 1 2 3 4 supplier statements are. the auditor is of the opinion that (s)he cannot rely on the internal controls of the company when verifying trade payable balances. 4 (a) (i) The purpose of an audit review is to consider whether: 1. Such a review may be carried out either internally or externally. only faxed or photocopied supplier statements are available and there is some doubt as to their authenticity. the audit work has been performed in accordance with the audit programme. (b) (1) Materiality Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. In this way readers of the financial statements should not be misled. To the extent that information is based on management opinion (for example.blogspot. or an omission from those financial statements. (3) Objectivity Information reflected in financial statements is normally a mixture of information sourced from verifiable facts and management opinion. during the course of the audit.com . from the same office or perhaps from another office of the same firm. Auditors need to be aware that the materiality of information. (2) Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards There is a universal acceptance that financial statements will not normally show a true and fair view. it may be carried out by another audit firm (a ‘peer review’). 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Work may be reviewed as and when it is being carried out by audit staff. An internal review may be carried out by suitably qualified staff. unavailable. (4) Disclosure In order that financial statements may show a true and fair view. Alternatively. Consequently. the auditor or the company. for whatever reason. com . (ii) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.(c) (i) A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being 'except for’ the effects of the matter to which the qualification relates. An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that an ‘except for’ qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.blogspot. Consideration should be given to the depth and relevance given by each candidate when answering the question.blogspot. so if a candidate concentrates on a few points then they should not be given as much recognition. In conclusion.com . 1 PEACH CO (a) Stating five objectives of the internal controls that should be exercised over a wages system. (i) Generally up to 1 mark for listing an application control up to a maximum of (1 x 3) Generally up to 1 mark for describing the application control up to a maximum of (1 x 3) (ii) Generally up to 1 mark for providing an example of use for each application control up to a maximum of (1 x 3) (3 marks) (3 marks) (3 marks) (b) Explanation of the effect that an implementation date of 1 September 2008 would have on firm’s audit of Plum Co’s financial statements for the year ending 31 October 2008. it is important that the overall standard of the candidate’s answers is considered in terms of whether it is above or below a pass grade. Generally up to 1 mark for identifying a weakness up to a maximum of (1 x 4) Generally up to 11/2 marks for describing the implication arising from the weakness up to a maximum of (11/2 x 4) Generally up to 11/2 marks for recommending improvements to address the weaknesses (11/2 x 4) (4 marks) (6 marks) (6 marks) (Total 25 marks) 2 PLUM CO (a) Listing and describing three categories of application controls over the input and processing of data and providing an example of its use. the total mark awarded should be evaluated to assess whether it is fair. The majority of the questions require several points to be included within the answer. If the answer is of a pass standard then it should be awarded a minimum of 40%. Generally up to 1 mark per point up to a maximum of (5 marks) (c) Identifying the inherent risks associated with ascertaining the quantity and value of inventory (including work in progress) of Plum Co for the year ending 31 October 2008.ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) June 2008 Marking Scheme The marking scheme generally indicates that up to 11/2 marks may be awarded for relevant points. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. Generally up to 1 mark per point up to a maximum of (11 marks) (Total 25 marks) 15 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. and their overall mark should be lower than a candidate who provides a range of points. After marking each question. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. for example if only a brief explanation is given then it may only be worth 1/2 mark whilst a detailed discussion could be worth up to a maximum of 11/2 marks. the candidate should be given full credit for such points. up to a maximum of (c) (4 marks) (5 marks) Identifying four weaknesses in the wages system of Peach Co. and the marks adjusted to ensure that the total awarded is fair. Generally 1 mark per objective up to a maximum of (b) Stating four controls that should be exercised over the data contained in the wages master file of a company. if it is below a pass standard then it should be awarded less than 40%. Generally 1 mark per point. describing implications arising from the weaknesses and recommending improvements to address the weaknesses. 3 PEAR CO (a) Listing five substantive procedures to verify the completeness and valuation assertions contained in the financial statements of Pear Co for the year ended 30 April 2008. Irrecoverable Debts Generally 1 mark per procedure up to a maximum of (1 x 5) Trade Payables Generally 1 mark per procedure up to a maximum of (1 x 5) Accruals Generally 1 mark per procedure up to a maximum of (1 x 5) Provision Generally 1 mark per procedure up to a maximum of (1 x 5) (b) (i) Explaining why an auditor may decide not to carry out a circularisation of trade payables. Generally up to 1 mark per point up to a maximum of (1 x 3) (ii) Identifying two situations when such a circularisation may be deemed appropriate. Generally up to 1 mark per each example up to a maximum of (1 x 2) (2 marks) (Total 25 marks) (3 marks) (5 marks) (5 marks) (5 marks) (5 marks) 4 REVIEW AND REPORTING (a) (i) Explaining the purpose of audit review. Generally up to 1 mark per point up to a maximum of (1 x 5) (ii) Stating when and by whom relevant review should be carried out for the two review types. Generally up to 1 mark per point up to a maximum of (1 x 2 x 2) Stating what should be gained from a thorough review. Generally up to 1 mark per point up to a maximum of (1 x 2) (b) Explaining relevance of three factors to the auditor when determining true and fair view. Generally up to 1 mark for each point for each factor with maximum of 3 marks for each factor up to a maximum of (3 x 3) (c) Describing the circumstances when (due to disagreement) an audit firm should express: (i) (ii) A qualified opinion – up to 1/2 mark per point up to a maximum of (1/2 x 5) An adverse opinion – up to 1/2 mark per point up to maximum of (1/2 x 5) (21/2 marks) (21/2 marks) (Total 25 marks) (9 marks) (2 marks) (4 marks) (5 marks) 16 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Certified Accounting Technician Examination Advanced Level Implementing Audit Procedures (International Stream) Monday 8 December 2008 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. The Association of Chartered Certified Accountants FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Paper T8 (INT) ALL FOUR questions are compulsory and MUST be attempted 1 Ruby Co produces kitchen units from factory premises, and prepares annual financial statements to 31 December. Its board comprises four directors, there being a managing director and directors of sales, production and finance & administration. The company employs only one buyer who reports directly to the managing director. Ruby Co exercises the following controls over the acquisition of tangible non-current assets: 1. In October the directors and the buyer meet to discuss the tangible non-current asset requirements of each functional area. At the end of the meeting an agreed list of acquisitions is approved and a copy is retained by all attendees. The buyer is then required to contact potential suppliers of the approved acquisitions to obtain confirmation of availability, and the lowest price for inclusion in the company’s tangible non-current assets expenditure budget for the forthcoming year. In December the directors and the buyer meet again to formalise and approve the tangible non-current asset expenditure budget. Following the meeting, a schedule is produced detailing approved acquisitions by category, expected month of purchase and budgeted cost as obtained by the buyer. The schedule then forms the basis of the tangible non-current assets expenditure budget of Ruby Co for the forthcoming year. Throughout the new year, on a monthly basis, without prior consultation the buyer places orders with suppliers ensuring that assets are acquired in the month as budgeted. As part of his remuneration package, the buyer is entitled to bonus payments equating to 10% of any saving he can negotiate on budgeted costs. Consequently assets may not necessarily be purchased from the suppliers contacted by the buyer for budgeting purposes. The buyer normally places orders to purchase by a simple e-mail message. However where required by suppliers he provides orders by way of a letter, which he signs. Having placed an order, the buyer calculates his bonus entitlement and forwards a copy of the calculation together with a copy of the order documentation to the managing director. He reviews this against his copy of the budget, prior to authorising as appropriate and forwarding to the accounts department for payment of the bonus as part of the buyer’s monthly salary. 2. 3. 4. 5. 6. Required: (a) State FOUR objectives of the internal controls that should be exercised over the acquisition of tangible non-current assets. (4 marks) (b) With regard to the tangible non-current assets acquisition system of Ruby Co: (i) Identify FOUR weaknesses in the system; (4 marks) (6 marks) (6 marks) (ii) Describe the implications of each weakness identified; and (iii) Recommend improvements to address the weaknesses. (c) Explain the purpose of a tangible non-current assets register, describe its contents and state how it should be used by a company. (5 marks) (25 marks) 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com (6 marks) (25 marks) 3 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.000 as at 30 November 2008. Your first task is to prepare a draft positive circularisation letter for review. with total balances outstanding of $960. (12 marks) (25 marks) 3 Your firm Penn & Company has assigned you to the audit of the trade receivables of Opal Co for its financial year ended 30 November 2008. (3 marks) (c) State EIGHT key procedures that members of your firm should carry out when attending the inventory count of Emerald Co on 31 January 2009. Your tasks include the organisation of a trade receivables circularisation in respect of balances as at that date. Required: (a) Identify and explain FOUR inherent risks associated with the inventory and work-in-progress of Emerald Co. (5 marks) (b) Explain the difference between a negative circularisation and a positive circularisation. it builds four fully equipped and furnished yachts annually. (3 marks) (c) Comment on the extent to which results from a negative circularisation may be relied upon to verify the existence of year-end receivable balances and contrast this to the reliability of the results received from a positive circularisation. (3 marks) (e) Prepare a draft positive circularisation letter to be forwarded with customer statements to the selected customers of Opal Co.O. approval and subsequent forwarding together with customer statements.T. (10 marks) (b) List THREE audit objectives of your firm’s attendance at the physical inventory count of Emerald Co on 31 January 2009. As the company’s auditors.2 Emerald Co builds luxury yachts on a ‘made to order’ basis for a worldwide client base. Your audit senior has selected the customer account balances for inclusion in the circularisation. The company’s operations are based in a large dockside yard. . Although it maintains inventory records throughout the year. Required: (a) Explain how your audit senior should have selected the sample of account balances for inclusion in the circularisation. Typically. Emerald Co relies on a physical count as a basis for the inclusion of an inventory value in its annual financial statements. (8 marks) (d) State with reasons who should forward the circularisation letters to the customers of Opal Co. with annual sales exceeding $80 million. Consequently the manager responsible for the audit has reviewed the adequacy of the inventory count instructions and is satisfied with them. Opal Co. is a book publishing company and there are in excess of 300 accounts in its trade receivables ledger.blogspot. your firm is now planning for attendance at the year-end inventory count on 31 January 2009. which houses ancillary production and administration buildings.com [P. ’ 2. it would be reasonable for us to expect the auditors to confirm whether the accounts are correct and error free. ‘The term true and fair is meaningless audit jargon. For the fee they charge us.blogspot.com . At the board meeting. (8 marks) (b) Explain why the production director’s comments about ‘true and fair’ and his expectation of the auditors are unreasonable. (9 marks) (c) (i) Explain the purpose of a letter of representation and describe the circumstances in which auditors should seek such a letter from the management of an audit client. 3. in readiness for the company’s forthcoming annual general meeting.’ Recalling that the managing director and financial director had signed a letter of representation in connection with the audited financial statements. the production director commented. (3 marks) (25 marks) End of Question Paper 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.4 The board of directors of Topaz Co met recently to discuss the company’s audited annual financial statements. the sales director enquired. ‘What are the differences between external auditors and internal auditors?’ Whilst reading the auditors’ report. Noting that the company’s auditors had recommended that the company should have an internal audit department. the following statements were made by the various directors: 1. the technical director stated. Required: (a) Explain the differences between external and internal auditors. (5 marks) (ii) Describe the actions auditors should take if management refuses to provide them with written representations. ‘I still don’t understand the purpose of that letter. com .Answers FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. g. assets are acquired only if there is a secure and safe environment for their subsequent use and/or storage. assets are acquired on the best possible terms. (i) (ii) Weakness Tangible non-current assets are acquired in months as budgeted irrespective of actual requirements. as budgeted – old asset beyond economical repair). assets are acquired only with proper authority. For both budgeted and non-budgeted requests. (ii) (iii) Recommendations The work carried out by the buyer in obtaining costs for inclusion in the budget should be closely scrutinised by the managing director to ensure that only bona fide lowest cost confirmations from a range of approved suppliers are considered for inclusion in the budget. (i) Weakness The buyer’s remuneration package from the company includes entitlement to bonus payment which he can easily influence by making fraudulent representations for inclusion in the company’s budget.ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) 1 (a) December 2008 Answers Objectives of the internal controls that should be exercised over the acquisition of tangible non-current assets are to ensure that: – – – – – – assets are acquired only when required by the entity. Implications Inflated acquisition costs could be included in the company’s budget in breach of the company’s policy to include only lowest confirmed prices. The request should be submitted to the managing director only on an ‘as required basis’. Robust documentary procedures should be put in place to ensure there is an adequate audit trail of authority documentation to support orders placed. (ii) 7 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. Implications Unauthorised purchases could be made. there is insufficient segregation of duties and control exercised with regard to the tasks carried out by the buyer. causing an unnecessary drain on cash flow. (iii) Recommendations Tangible non-current assets should be acquired only on the specific request of the relevant functional director. Implications Tangible non-current assets will probably be acquired without need by the company. 3. 4. Implications Fraud could easily be perpetrated against the company. transactions pertaining to asset acquisitions are properly accounted for and recorded. Implications The buyer could easily perpetrate fraud against the company and it is probable that the objectives of the system for acquiring tangible non-current assets will not be met. (Full marks will be awarded for stating any FOUR of the above points or other appropriate objectives) (b) 1. This could lead to a false impression of the buyer’s subsequent efficiency in acquiring assets at favourable prices. (i) Weakness There is no control exercised over the buyer to ensure that best prices are obtained for inclusion in the tangible non-current assets acquisitions budget. (ii) (iii) Recommendations The current system should be changed to ensure that the buyer is not in a position to easily perpetrate fraud and to ensure that all systems objectives are met. the managing director should make appropriate checks and enquiries to ensure the purchase will be in the best interest of Ruby Co. (See points 2 to 7 below) 2. non-utilisation of acquisitions and losses due simply to an inefficient acquisition policy. (iii) Recommendations The buyer should place orders to purchase tangible non-current assets only after having received specific authority from the managing director.blogspot. (i) (ii) Weakness The buyer has unfettered authority to order tangible non-current asset purchases.. assets are only acquired for use by the entity. (i) Weakness Overall. 5. Submissions made on appropriate approval documentation should state the reason for the request (e.com . (Full marks will be given for identifying any FOUR of the above or other weaknesses) (c) The purpose of a tangible non-current assets register is to list details of all the non-current assets owned by an entity.blogspot. 7. (2) The value of work-in-progress is likely to be material and the valuation process is likely to be complex. custody and disposal of assets. net book value. the buyer’s bonus should only be authorised after the acquisition of the specified assets. in order to facilitate control over those assets.(iii) Recommendations The current system is fraught with difficulty and there is a high risk that if the buyer’s bonus continues to be based on savings against costs obtained by her/him. rigorous procedures should be introduced to ensure that budgeted cost figures are bona fide and that the buyer makes genuine endeavours to obtain the lowest available costs for inclusion in the budget. Implication Unauthorised orders could be placed on behalf of the company resulting in unauthorised payments to suppliers. 2 (a) Inherent risks associated with the inventory and work-in-progress of Emerald Co: (1) The value of inventory and work-in-progress presented in the company’s financial statements is a function of quantity and value. There is a risk of error in the valuation in this regard. to ensure that all authorised ordering procedures are being adhered to. depreciation and net book value information of each asset along with identifying details. will be of ‘nil value’ or ‘scrap value’ to Emerald Co. Copies of purchase orders raised should be forwarded to the company’s goods received area and to the company’s accounts department for checking against subsequent goods received and supplier documentation. Orders should be raised by the buyer only after having received authority to do so from the managing director (see (4) above). the absorption of appropriate overheads and ensuring that these are correctly reflected in the closing valuation. 6. The nature of the inventory and work-in-progress is such that there are numerous product lines/inventory items with a range of values including many high value items. portable and desirable to employees and third parties. (iii) Recommendations The company should use multi-part sequentially numbered purchase orders. There is a risk that such items could be over valued. Implication There is an increased risk of unauthorised deliveries of tangible non-current assets being accepted by the company leading to problems with suppliers. date of acquisition. Typically. the buyer cannot ensure that he has a copy of all orders. Similarly to ensure completeness of recording. The absence of sequential numbered purchase orders increases the likelihood of duplicated purchase orders. 8 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. The register should be updated by individuals who are separated from the acquisition. This is because when checking orders raised under the current systems. however technological advances may render some lines obsolete. It will involve the allocation of direct costs. serial number and description and location of asset. (5) Many product lines/inventory items will be common to the building of all yachts. will be of high value. Company management should ensure that there is independent checking of assets recorded for existence and condition. annual depreciation rate. Any discrepancies should be investigated with appropriate follow up action by management. checks should be made to ensure that assets in existence are properly recorded in the register. depreciation provision. the register should record cost. If however the directors wish to motivate the buyer by offering a bonus payment for savings made on budget. In these circumstances. For example in the case of plant and machinery – gross cost. (4) Many of the product lines/inventory items. There is a risk that these could be included erroneously at full cost value in the inventory valuation. There is therefore a risk of error in quantifying and valuing these. There is therefore a risk of loss due to the misappropriation of such items. (i) (ii) Weakness The company does not use formal sequentially numbered purchase order (capital expenditure) stationery.com . the buyer will not act in the interest of the company. (3) As a consequence of the company’s ‘made to order’ policy. (i) Weakness Purchase orders raised by the buyer are not subject to review or scrutiny by an appropriate responsible official of the company. and the possibility of erroneous payments. Therefore an alternative method of motivating the buyer should be introduced. there is a strong probability that parts and equipment purchases being surplus to requirement for specified yacht completion. (ii) (iii) Recommendation All purchase orders raised by the buyer should be subject to frequent random review and scrutiny by either the managing director or the finance and administration director. for example satellite navigation systems and exquisite luxury furnishings. accounts containing round sum payments. (2) Obtain completed inventory sheets and carry out test counts on a sample basis to ensure that inventory lines are accurately described and that counts are accurately recorded. A negative circularisation is one in which letters are forwarded to customers with the request that they respond to the company auditors only if they do not agree with the stated balance. (7) For subsequent use in cut-off tests. (5) Enquire as to the possibility of consignment or third party inventories being held by the company and record appropriate notes for subsequent follow up. (8) Check that the items listed on the notes in (7) above have been correctly included/excluded in/from the closing inventory quantities. the audit senior should have ensured that: (i) (ii) The sample was based on the total population of the trade receivables accounts. accounts to which credit notes/journals have been posted close to the year-end. (3) Confirm the condition of inventory. (iii) Due consideration was applied to the following categories of account for inclusion in the sample: (i) (ii) (iii) (iv) (v) (vi) (vii) (b) long standing unpaid accounts. There is therefore a risk that damaged inventory lines could be over valued. (4) Provide corroborative evidence that inventory is owned by Emerald Co. (9) Observe goods received quantities in the goods received area and check to ensure that these have been correctly included in closing inventory quantities. In order to ensure testing of a sufficient proportion of the total value of receivables. (Full marks will be awarded for stating any EIGHT of the above or other key procedures) 3 (a) When selecting a sample of account balances for inclusion in the trade receivables circularisation. (2) Ensure that the inventory exists. nil balance accounts. providing possible indicators that inventory is not owned by the company. (3) Note any inventory that is set aside or specially marked.com . accounts containing unusual transactions. the sample should have been selected after the stratification of account balances. Response rates to negative circularisation letters are often very low. (4) Record details of inventory not owned by the company. for subsequent follow-up when verifying completeness of inventory reflected in the company’s financial statements. (Full marks will be awarded for stating any THREE of the above or other relevant objectives) (c) The following key procedures should be carried out by members of my firm when attending the inventory count of Emerald Co on 31 January 2009: (1) Observe the procedures carried out by the company employees to ensure compliance with the inventory count instructions.blogspot. if not in agreement. credit balance accounts. (Full marks will be awarded for stating any FOUR of the above or other relevant inherent risks) (b) The audit objectives of attending the physical inventory count are to: (1) Ensure that the inventory count instructions are followed. the response may not be received due to non-delivery (c) 9 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. record the number of the last goods received note and stores issue note. (6) Observe and record inventory movements during the count. to provide full details of the balance as per their own records. A positive circularisation letter asks customers to respond to the company auditors to either confirm the stated balance or. (10) Record the number of inventory sheets issued to inventory checkers and returned to the count supervisor. (5) Obtain information to verify that cut-off procedures are correctly applied. dormant accounts. Highlight inventory lines counted and results.(6) The delicate and fragile nature of various high value inventory items means that there is a strong possibility of them being damaged prior to the building and fitting out of yachts. For example. However the reason for the low response rate does not necessarily indicate agreement of balances by customers. . For these reasons.. or simply because customers do not have the time to respond. This is to prevent the possibility of letters being intercepted by a dishonest employee of the company who would intend confirming the incorrect balances in order to hide earlier misappropriations... Opal Co Address Dear Sirs As part of their normal audit procedures..... Report To Responsibilities Scope of Work To express an opinion on whether financial statements show a true and fair view. (d) A member of my own audit team should forward the circularisation letters to the customers of Opal Co...... caution should be exercised in interpreting the results of the circularisation. the results from a positive circularisation tend to be more reliable than those received from a negative circularisation. however whilst written confirmation by customers does provide good audit evidence of the existence of receivable balances.. In summary whilst both positive and negative circularisation methods carry a degree of sampling risk (risk that the results obtained from the sample selected are not representative of the total population of receivables balances).. Members – formally in an auditor’s report on the truth and fairness of the financial statements of the company..com . Response rates to positive circularisations are normally higher than those for negative circularisations.... the results of a negative circularisation should not be solely relied on to confirm the existence of receivable balances... then please notify our auditors directly of the amount shown by your records and if possible send them full particulars of the difference...... If the statement is not in agreement with your records... will often encompass responsibilities focusing on business risk assessment/evaluation and evaluation and effectiveness of internal control..... Please do not detach Name of Trade Receivable The balance shown on the statement as at 30/11/08 of $…………due from us is in agreement with our records at 30/11/08 ………………………...... we have been requested by our auditors Penn & Company to ask you to confirm direct to them your indebtedness to us as shown on the enclosed statement as at 30 November 2008.. It will be of assistance to us if you will give this request your urgent attention... please sign in the space provided below and return this letter directly to our auditors.. Management – formally or informally by verbal/written communication on any matter deemed appropriate by management.of letter to customers.. Determined by management.... Qualification requirements are determined by management..blogspot...Position (Full marks will be awarded to answers presented in alternative format but containing all relevant points) Customer’s Name Customer’s Address Date (e) 4 (a) The differences between external and internal auditors may be summarised as follows: External Appointment Process Determined by statute appointed by members.. Determined by management. We enclose a reply-paid envelope for your convenience.. Formal auditing qualifications are required. governed by the extent of responsibilities (above).. For example....Signature ………………………. where an employee has diverted monies forwarded for banking by Opal Co to a bank account in which they have a personal interest. auditors should exercise caution in assuming that no further evidence should be sought in this regard. Internal Determined by management appointed by management....... some customers will confirm agreement irrespective of the balance outstanding per their own records.... as indicated above. If the statement is in agreement with your records. whilst some customers will simply refrain from providing any response to the circularisation. because customers do not wish to divulge that balances stated are lower than those shown in their own records. 10 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani...... Your faithfully XXXXXX For Opal Co ………………………………………………………………………………. However.. Determined by statute.. whilst others will confirm on the basis that they would not wish to divulge a higher level of debt per their own records. Additionally cut-off differences may lead to misleading confirmation from customers.... For example.... the professions. There is however no statutory definition of the term ‘true and fair’. Whilst many of these will be corroborated by sufficient evidence from other sources (with varying degrees of reliability). Procedures are often extensive in terms of time taken. There may be instances when representations from management is the only form of audit evidence available. Consequently the content of the concept is subject to continuous change and development as commentators in academia. the auditor with overall responsibility for the audit should ensure that written representations are received from management. auditors seek only to assure readers that the financial statements confirm with reality and factual information and that they have been prepared objectively and without bias in accordance with relevant statute(s) and standards. auditors use subjective judgement and should carry out procedures in accordance with International Standards on Auditing in arriving at that conclusion. Similarly. Similarly. audit staff will discuss issues relating to the financial statements with management and will often receive verbal clarification. normally in the letter of representation. then they will not show a true and fair view. confirmation and assurances in connection with various material matters. then the auditor may receive written management representation in this regard by way of inclusion in a letter of representation addressed to the auditor. the term ‘true and fair’ is a legal term and the production director is wrong in asserting that it is ‘meaningless audit jargon’. the financial statements will not show a true and fair view. Similarly. when carrying out their work. It is generally accepted that if financial statements have not been prepared in accordance with generally accepted accounting principles and International Accounting Standards. or there is a material omission from them. objective and free from bias’. In such instances. In summary. as audit evidence. the auditors would be relying on management’s genuine intention to pay the bonuses at some future date. a letter containing appropriate representations should be sought when the matter or issue under review is principally one of subjective opinion or judgement on the part of management. In such an instance the auditors should seek a written representation. some will not. ‘based on fact and reality. where an auditor requires audit evidence (in the form of written representations from management) pertaining to the financial statements on which insufficient evidence has been obtained from other sources. In arriving at a conclusion as to whether financial statements do show a true and fair view. whereas ‘true and fair’ is an abstract term with both words incorporating subjective notions. (ii) If management refuses to provide a written representation. industry and commerce continue to debate its meaning. usually in the form of a letter of representation. ‘Correct’ is an absolute term.com . I believe that both the comment made and expectation of the auditors by the production director of Topaz Co are unreasonable. Where for example discretionary bonuses payable to employees have been accrued in the financial statements. if they contain a material error. then the auditor should again review the possibility of obtaining sufficient audit evidence from alternative sources in connection with the matter or issue under review. They also seek to assure readers that the financial statements are free from material error or omission. and that it approves them. resources and cost. By necessity. There is a general consensus by all of the above that ‘true and fair’ does not mean ‘correct and error free’. such representation may be included in a letter of representation. 11 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani. (c) (i) If an auditor has been unable to obtain written evidence (for example from board minutes) that the management of an entity accepts its responsibility for the preparation and fair presentation of the financial statements. Certainly the term does not mean ‘error free’. Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. If evidence is unobtainable then the auditor should express a qualified opinion or a disclaimer of opinion on the basis of scope limitation. Auditors should however not substitute this type of evidence for audit evidence that could reasonably be expected to be available. Thus.blogspot.(b) When reporting to members on a set of financial statements. There is however consensus that it means. during the course of an audit. auditors are required by statute to report whether those financial statements show a true and fair view. On the basis of the foregoing. the candidate should be given full credit for such points. Generally up to 11/2 marks per procedure up to a maximum of 8 x 11/2 (12 marks) (Total 25 marks) 13 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.ACCA Certified Accounting Technician Examination – Paper T8 (INT) Implementing Audit Procedures (International Stream) December 2008 Marking Scheme The marking scheme generally indicates that up to 11/2 marks may be awarded for relevant points. and the marks adjusted to ensure that the total awarded is fair. for example if only a brief explanation is given then it may only be worth 1/2 mark whilst a detailed discussion could be worth up to a maximum of 11/2 marks. Generally 1 mark for each weakness identified. up to 11/2 marks for describing the implications arising and up to 11/2 marks for recommending improvements to address the weakness 4 x (1 + 11/2 + 11/2) up to a maximum of (16 marks) (c) Explaining the purpose of a tangible non-current assets register. If the answer is of a pass standard then it should be awarded a minimum of 40%. 1 (a) Stating four objectives of the internal control that should be exercised over the acquisition of tangible non-current assets. the total mark awarded should be evaluated to assess whether it is fair. In conclusion. If it is decided that the total mark is not a proper reflection of the standard of the candidate’s answer then the answer should be reviewed again. so if a candidate concentrates on a few points then they should not be given as much recognition. Generally 21/2 marks for each risk identified (1) and explained (11/2) up to a maximum of 4 x 21/2 (10 marks) (b) Stating three audit objectives of firm’s attendance at the physical inventory count of Emerald Co on 31 January 2009.com . Generally up to 1 mark per objective up to a maximum of (3 marks) (c) Listing eight key procedures that members of audit firm should carry out when attending the inventory count of Emerald Co on 31 January 2009. and their overall mark should be lower than a candidate who provides a range of points. Generally 1/2 mark per point up to a maximum of (5 marks) (Total 25 marks) 2 (a) Identifying and explaining four inherent risks associated with the inventory and work-in-progress of Emerald Co. Consideration should be given to the depth and relevance given by each candidate when answering the question.blogspot. After marking each question. (4 marks) (iii) Recommending improvements to address the weakness. The majority of the questions require several points to be included within the answer. Describing the implications of the weakness identified. if it is below a pass standard then it should be awarded less than 40%. describing its contents and stating how it should be used by a company. it is important that the overall standard of the candidate’s answers is considered in terms of whether it is above or below a pass grade. Generally 1 mark per objective up to a maximum of (b) (i) (ii) Identifying four weaknesses in the non-current tangible assets acquisition system of Ruby Co. Marks are not allocated to specific points as the candidate may include a valid point within their answer which is not included in the model answer. Up to 1/2 mark per point up to a maximum of (3 marks) (c) Comment on the extent to which results from a negative circularisation may be relied upon to verify the existence of year end receivable balances and contrasting this to the results received from a positive circularisation. Generally up to 1 mark per point. Generally up to 1 mark per point up to a maximum of (8 marks) (b) Explaining why the production director’s comment about ‘true and fair’ and his expectations of the auditors are unreasonable.com .3 (a) Explaining the strategy that should have been adopted when selecting a sample of balances for inclusion in the trade receivables circularisation. generally per point up to a maximum of (5 marks) (Total 25 marks) 4 (a) Explaining the difference between external and internal auditors. Generally up to 1 mark per point up to a maximum of (9 marks) (c) (i) Explaining the purpose of a letter of representation and describing the circumstances in which auditors should seek such a letter from the management of an audit client. Generally up to 1 mark per point up to a maximum of (3 marks) (1 mark) 1/ 2 (e) Format of letter up to Points included in letter. Generally 1/2 mark per point up to a maximum of (3 marks) (Total 25 marks) 14 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot. Generally up to 1 mark per point up to a maximum of (8 marks) (d) Stating with reasons who should forward the circularisation letters to the customers of Opal Co. including 1/2 mark for each category of account to be included in sample up to a maximum of (5 marks) (b) Explaining the difference between a positive circularisation and a negative circularisation. Generally 1/2 mark per point up to a maximum of (5 marks) (ii) Describing the action auditors should take if management refuses to provide them with representations.
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