Mock Examination M kE i ti: ACCA P Paper P7 Advanced Audit and Assurance Session Set by : June 2012 : AP Chee Hay Kheong Your Lecturer AP Chee Hay Kheong Your Mailing Address : ______________________________________ ______________________________________ Your Contact Number : ______________________________________ I wish to have my script marked by my lecturer and collect the marked script at the SAA-GE Reception Counter y have the marked script returned to me by mail (Please submit your script latest by 16th May 2012 for marking) SAA GLOBAL EDUCATION CENTRE PTE LTD Company Registration No. 201001206N 20 Aljunied Road, #01-04, CPA House, Singapore 389805 Tel: (65) 6744 9700 Fax: (65) 6744 9796 Website: www.saage.edu.sg Email: [email protected] Using this information. In the attachment. You are currently planning the audit of the financial statements for the year ending 31 August 2012. please prepare notes for inclusion in the planning section of the working papers. is a carpet manufacture. (12 marks) Thank you. a limited liability company. You have received an email from Holly Elm. the audit engagement partner. which identify and explain the risk of material misstatement to be considered in planning the final audit. Audit partner Subject: Scorpio – audit planning Hello I would like you to start planning the audit of Scorpio. 1 .Question 1 (a) Scorpio. To: Audit manager From: Holly Elm. Your firm was appointed as auditor to Island Co for the first time in May 2012. you find the information I have obtained from the planning meeting with the chief executive officer of Scorpio. Although there has been a recent downturn in trading. Ursula Minor.Email – Attachment The chief executive of Scorpio. Two members of the management board of Scorpio hold minority interests in Andromeda. Ursula Minor has stated that she is very confident that the negotiations with the bank will be successful as Scorpio has met its budgeted profit for the first six months. to reduce inventory and accounts receivable to estimated realizable values. Upon enquiry. reflect a rising profit trend. There are plans to sell two similar properties later in the year and outsource warehousing. a limited liability company. Budget forecasts for Scorpio. who is also a majority in Scorpio. Ursula wishes the audit to be completed by 30 September 2012. have been reduced to assist with the loan application. one month earlier than originally agreed with the audit partner in audit appointment. is negotiating with a bigger competitor Bellatrix who is interested in acquiring Scorpio. Selling prices negotiated between Scorpio and Andromeda appear to be on an arm’s length basis.000. Note: Include 3 professional marks (15 marks) 2 . Scorpio’s results for the first half year to 29 February 2012 reflect a $800. About 10% of Scorpio’s sales are to Andromeda. Potential buyer has been found and preliminary negotiation has just begun. As such. These management accounts show inventory and trade receivables balances that exceed the figures in the accounting records by $150. Ursula Minor. which had been carried in the books at historical cost. Ursula believes that increased demand for carpets and rugs in the winter months will enable results to exceed budget. Scorpio’s current trading performance is satisfactory and future prospects are good. for the current accounting year to 31 August 2012 and for the following year. Scorpio’s management accounts for the six months to 31 May 2012 have been used to support an application to the bank for an additional loan facility to refurbish the executive and administration offices. you have established that allowances.000 profit from the sale of a warehouse. Required: Respond to the partner’s email. This excess has also been reflected in the first half year’s profit. believes that despite its current cash flow difficulties. You are responsible for evaluating potential assurance engagements. I am keen to hear your views on this matter at your earliest convenience. Petsupply Co has been an audit client of Dyke & Co for the past three years. Dyke & Co is keen to expand the assurance services offered. some of which is shown below in Table 1. and found a great deal of numerical data provided. We would like verification of the data as soon as possible. The finance director of Petsupply Co recently communicated with your firm to enquire about the provision of an assurance report on data provided in the Environmental Report published on the company’s website. and to attract new customers. 3 . It is therefore important to us that Petsupply Co reports positive information which should help to retain existing customers. which specialises in providing audits and financial statement reviews for small to medium-sized companies. and for producing a brief report on each prospective piece of work to be used by the partners in your firm when deciding whether to accept or decline the engagement. The company owns and operates a chain of retail outlets selling pet supplies. and information gathered from our website indicates that our customers are very interested in environmental matters. as a replacement for revenue lost from the many small-company clients choosing not to have a statutory audit in recent years. It is currently October 2011. They are keen to ensure that the data contained in the report is credible. and they have asked whether your firm would be willing to provide some kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to disclosing environmental data. my fellow directors discussed the content of the Environmental Report.’ You have looked at Petsupply Co’s Environmental Report on the company website. The following is an extract from the e-mail sent to your firm from the finance director of Petsupply Co: ‘At the last board meeting.(b) You are a senior manager in Dyke & Co. a small firm of Certified Public Accountants. and other issues raised in deciding whether to accept the appointment as provider of an assurance opinion as requested by Petsupply Co. (12 marks) Note: this requirement includes three professional marks. to be used by a partner in your firm.Required: Prepare a report. (15 marks) 4 . ethical. in which you identify and evaluate the professional. However. In our opinion. for the years ended 30 September 2010. Howard is material to Cleeves and audited by another firm. You have just received Parr’s draft auditor’s report for the year ended 30 September 2010. (7 marks) Briefly explain the implications of Parr & Co’s audit opinion for your audit opinion on the consolidated financial statements of Cleeves Co for the year ended 30 September 2010. The wording is that of an unmodified report except for the opinion paragraph which is as follows: Audit opinion As more fully explained in notes 11 and 15 impairment losses on noncurrent assets have not been recognised in profit or loss as the directors are unable to quantify the amounts. provision should be made for these as required by Financial Reporting Standard 36 (Impairment). as the directors are unable to quantify the amounts we are unable to indicate the financial effect of such omissions. in our opinion the financial statements do not give a true and fair view of the financial position of Howard Co as of 30 September 2010 and of its loss and its cash flows for the year then ended in accordance with Singapore Financial Reporting Standards. Parr & Co. In view of the failure to provide for the impairments referred to above. (3 marks) (10 marks) (ii) 5 .(c) You are an audit manager in a firm of Certified Public Accountants currently assigned to the audit of Cleeves Co for the year ended 30 September 2010. During the year Cleeves acquired a 100% interest in Howard Co. Your review of the prior year auditor’s report shows that the 2009 audit opinion was worded identically. If the provision had been so recognised the effect would have been to increase the loss before and after tax for the year and to reduce the value of tangible and intangible non-current assets. Required: (i) Critically appraise the appropriateness of the audit opinion given by Parr & Co on the financial statements of Howard Co. The audit senior has produced a schedule of “Points for the Attention of the Audit Manager” as follows: 1. ‘Debit Sundry 1 account/Credit Sundry 2 6 . (14 marks) (b) You are the manager responsible for the audit of Eagle Energy. a private limited liability company. ii. All industrial waste from the furnaces (“clinker”) is purchased by Cleanaway. comment on the matters that you would consider. (7 marks) Required: For each of the above points: i. The overhaul is planned for May 2013 when all foundry workers take two weeks annual leave.Question 2 (a) You are the manager responsible for the audit of Phoenix. The following issue arising during the final audit has been noted on a schedule of points for your attention: Eagle Energy receives significant funding from government sources and is required to report. on its financial performance and position.000 provision for future maintenance. Troy Pitz is the majority shareholder of Cleanaway. The draft accounts for the year ended 31 May 2012 show profit before taxation of $1. the chief executive. which manufactures super alloys from imported zinc and aluminium. The company operates three similar foundries at different sites under the direction of Troy Pitz. Every month end a journal entry is made. This represents the estimated cost of overhauling the blast furnaces and other foundry equipment. A recent newspaper article states that “substantial fines have been levied on Cleanaway for illegal dumping”.7m (2011 – $1. in undertaking your review of the audit working papers and financial statements of Phoenix. monthly. Current liabilities include a $500. under a five-year contract that is due for renewal later this year. profit before taxation of $7·2 million (2011 – $23 million) and total assets of $242 million (2011 – $221 million). a government-approved disposal company.5m). an energy generation company. (7 marks) 2. The draft financial statements for the year ended 30 April 2012 show revenue of $287 million (2011 – $262 million). and state the audit evidence that you would expect to find. The entries are then reversed at the beginning of the following month. Manu will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Details are as follows: (a) Manu Co is a subsidiary of Club Co. However. (5 marks) (b) Lavin Co has changed its accounting policy for inventory during the year from first-in-first-out to weighted average basis. No disclosure of this change has been given in the financial statements.account’. due to the seriousness of the situation. The audit senior has suggested that. the audit opinion must at least be qualified ‘except for’. Manu has received a letter of support (‘comfort letter’) from Club Co. a note to the financial statements shows that property rental represents 7 . Serious going concern problems have been noted during this year’s audit. a firm of Chartered Certified Accountants. There is no narrative but the chief accountant explained that the journal is approved by the chief executive to ensure that reported debt ratios stay within government specified limits. (20 marks) Question 3 You are the manager responsible for four audit clients of Alex & Co. in undertaking your review of the audit working papers and financial statements of Eagle Energy for the year ended 30 April 2012. The carrying amount of inventory in the statement of financial position as at 30 September 2011 zero as it happened that there was no inventory at year end. The year end in each case is 30 September 2011. (6 marks) Required: For the above issue: (i) (ii) comment on the matters that you should consider. The audit senior has concluded that a qualification is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 marks) (c) The directors’ report in the annual report of Abio Co states that investment property rental forms a major part of revenue. and state the audit evidence that you should expect to find. You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. The net movement on these accounts over the year to 30 April 2012 was $0·3 million. only 1·6% of total revenue for the year. a listed company. The following matters have arisen during the audit of the group’s financial statements for the year to March 2012 which is nearing completion: (1) The chief executive of Aventura International. on a monthly basis. Question 4 Aventura International. Kirsten had been Voest’s accountant in charge of the audit of Aventura. Armando Thyolo. Before joining Aventura in December 2011. The audit senior assigned to the audit of Jurong has documented that Jurong’s finance director explained that Bedok commenced trading on 7 October 2011. Note: The mark allocation is shown against each of the four issues. Kirsten Fennimore. Last week Armando announced his engagement to be married to his personal assistant. manufactures and wholesales a wide variety of products including fashion clothes and audio-video equipment. a firm of Chartered Certified Accountants. and the audit manager is Darius Harken. (10 marks) 8 . (20 marks) (2) Required: Discuss the ethical issues raised and the actions which might be taken by the auditor in relation to these matters. (5 marks) Required: For each situation. indicate what audit modification (if any) should be given instead. for that proportion of the operating costs which reflects business use. comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. The audit senior has noted that although no other evidence has been obtained an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. The audit senior is satisfied that the revenue figures are correct. Neither Aventura nor Voest have any offices or associates in Florida. The audit senior has noted that an unqualified opinion should be given as the audit opinion does not extend to the directors’ report. (4 marks) (d) Audit work on the after-date bank transactions of Jurong Co has identified a transfer of cash from Bedok Co. owns a private jet. Armando invoices the company. The company is audited by Voest. One of these invoices shows that Darius Harken was flown to Florida in December 2011 and flown back two weeks later. after being set up as a wholly-owned foreign subsidiary of Jurong. Where you disagree. One of your audit clients Beegees Co provides satellite broadcasting services in a rapidly growing market. a firm of Certified Public Accountants. Explain what effect the acquisitions will have on the planning of Robo & Co’s audit of the consolidated financial statements of Beegees Co for the year ending 31 May 2012. (10 marks) 9 . The financial statements of Mute for the year ending 30 April 2012 will continue to be audited by a local firm of Certified Public Accountants. where your firm has no representation. In May 2011 Beegees purchased Mute Co. a large cable communications provider in India.Question 5 You are an audit manager in Robo & Co.