Module 19

Question 1

Main risk in relation to investments

Answer 1

Valuation (especially if unlisted)

Question 2

Specific considerations for valuation and presentation of long term investments (5)

Answer 2

• Obtain evidence as to company’s ability to hold investments on long-term basis
• Discuss plans with management
• Obtain written representations
• Review financial statements of investment company to support carrying amount
• Consider impairment

Question 3

Other receivables (prepayments and accrued income) tested through: (3)

Answer 3

• SAPs
• Agreeing to supporting documentation
• Reviewing subsequent events

Question 4

When auditing bank and cash, auditor performs

Answer 4

Tests of detail on closing balance

Question 5

Common substantive tests for bank and cash include (5)

Answer 5

• Testing the bank reconciliation
• Testing the bank confirmation letter
• Physical cash count of material cash balances
• Verifying foreign currency rates used for FX accounts and recalculating the translation
• Considering appropriate presentation and disclosure

Question 6

Bank confirmation letter must be obtained for

Answer 6

All bank accounts open at any time during the year

Question 7

Important assertion for bank and cash

Answer 7

Presentation

Question 8

Overdrafts presentation (2)

Answer 8

• Should not be netted off against positive balances unless bank has a legal right of set off
• If secured on assets or guaranteed by third party should be disclosed

Question 9

Key risk of accruals and other payables and non-current liabilities is

Answer 9

Understatement, therefore key assertions = C, A, V and Allocation

Question 10

Financial statements should include (capital, reserves and equity accounts)

Answer 10

Disclosure note reconciling opening and closing balances therefore audit this

Question 11

Private companies > audit of capital and reserves

Answer 11

Should present very little risk

Question 12

Public companies > audit of capital and reserves

Answer 12

Movements in share capital and reserves can be very large, higher risk

Question 13

Revaluation reserve testing (2)

Answer 13

• Obtain calculation for release of reval reserve and agree to supporting documentation
• Perform recalc to ensure amount released is accurate

Question 14

Capital redemption reserve testing

Answer 14

Agree transfer to capital redemption reserve is in line with Companies Act and recalculate using supporting documentation

Question 15

Other reserves testing

Answer 15

Review board minutes to ensure no movements within other reserves category

Question 16

Retained earnings testing (2)

Answer 16

• Sample of cash flow hedges, obtain supporting documentation to ensure valid transaction, obtain third party exchange rate and recalc
• Agree profit transferred for the year to P&L account to ensure amount accurate

Question 17

Ordinary shares/ share premium testing (5)

Answer 17

• Agree share issues/ purchases to bank statements
• Agree share capital details to statutory books/ memorandum of association
• Review board mins for discussion and approval of share issue/ purchase and any other transactions not currently disclosed
• Recalc share premium
• Ensure issue costs correctly capitalised

Question 18

Auditor’s role when auditing contingencies

Answer 18

Verifying whether any contingencies should be disclosed

Question 19

Common contingent liabilities (5)

Answer 19

• Guarantees
• Charges held by third parties over the company’s assets
• Litigation
• Liabilities under warranties
• Claims for dilapidations under leases

Question 20

Income statement, may gather most audit evidence from

Answer 20

Tests of controls (due to large volume of transactions)

Question 21

Analytical procedures - ISA requirement

Answer 21

Final analytical procedures must be performed

Question 22

Tests of details on income statement

Answer 22

Where auditor can rely on controls, ToD are usually limited to testing opening and closing balances on balance sheet eg revenue > test TR, expenses > test TP

Question 23

Key risk of revenue

Answer 23

Occurrence (especially where there is a risk of fraud)

Question 24

Non statistical sampling

Answer 24

Does not display characteristics of statistical sampling, generally based on judgement of the auditor