March 2020 exam short form Qs

Question 1

look at question bank question 81.1, page 143

Answer 1

look at question bank question 81.1, page 519

Question 2

List the benefits to audited entities of having non-audit services provided by their external
auditor and explain why the audit profession has been criticised for the provision of such
services.
(4 marks)

Answer 2

Benefits
* Auditor understands the entity’s business
* Higher quality audit/non-audit service
* Less disruption/more efficient
* Reduced costs due to pooling of background information
* Comfort from having services provided by trusted source
Reasons for criticisms
* High profile corporate collapses following clean audit reports
* Self-interest threat to independence/objectivity
* Less professional scepticism
* Firm reluctant to take actions which adversely impact ability to obtain non-audit services in
the future
* Which may actually reduce audit quality

Question 3

Your firm is finalising its work on the external audit of Torquil Ltd’s (Torquil) financial statements
for the year ended 31 December 20X9. On 15 January 20Y0, Krall Ltd, a major customer of
Torquil, went into liquidation.
Requirements
List the actions your firm should take in respect of this matter before reaching its opinion on
Torquil’s financial statements.
(4 marks)

Answer 3

Actions re major customer in liquidation
Ascertain if amounts
* are due from Krall at 31 Dec 20X9
* are material
* have subsequently been paid by Krall
Discuss with directors their intentions regarding amounts due
Evaluate appropriateness of adjustments to FS
Review any correspondence with liquidator to ascertain recoverability
Obtain written representation re completeness of adjustment(s)
Ascertain proportion of revenue earned by Torquil from Krall
Ascertain management’s plans for replacing the business
Request updated profit and cash flow forecasts
Consider if any uncertainty re going concern
Consider impact on auditor’s report.

Question 4

Explain why external auditors obtain written representations from the directors of audited
entities.
(4 marks)

Answer 4

Why auditor obtains written representations from directors of audited entities
Required by Auditing Standards/ISA 580
* management has fulfilled its responsibilities for preparation of FS
* management has provided all relevant information
* all transactions recorded/reflected in FS
To obtain evidence / support other evidence re management’s:
* judgements
* intentions

Question 5

During the external audit of Rosier Ltd (Rosier), the audit team discovered that Rosier’s
warehouse employees do not perform any checks when accepting the delivery of goods.
Requirement
Outline the internal control procedures Rosier should have in place over the acceptance of
goods received in the warehouse. Briefly explain the benefits to Rosier of each internal control
procedure outlined.
(3 marks)

Answer 5

Internal control procedures over the acceptance of goods and benefits
Check the quality/condition for damage
* avoid damaged items being used/sold to customers
* resulting in faults/returns/loss of customer goodwill
Count quantity/type of goods and agree to purchase order
* ensure no items missing
* correct items delivered
* ensure bona fide order/not fraudulent order
Create goods received record/notify accounts department
* avoid being invoiced for incorrect/missing items
Reduce risk of:
* unexpected stock outs/business disruption
* misappropriation
* negative impact on profit/cashflows

Question 6

During the external audit of Lally Ltd for the year ended 31 December 20X9, your firm was
unable to rely on the system of internal controls over cash sales. There were no alternative
audit procedures that your firm could perform to satisfy itself that cash sales were free from
material misstatement. Cash sales represent 10% of total revenue.
Requirement
State, with reasons, the implications for your auditor’s report.
(3 marks)

Answer 6

Implications for auditor’s report
Inability to obtain sufficient appropriate audit evidence
Material
Not pervasive
Confined to specific element/cash sales
Modified report/opinion
Qualified
Basis for qualified opinion
Reasons for qualification
Report by exception under CA06
* Not able to obtain all information necessary
* Adequate accounting records not maintained