Section A

Question 1

Audit risk/ ROMM

Answer 1

MATERIALITY- E.g. Is the figure material compared to the benchmark materiality?
ACC TREATMENT-What should this be? (What the client has actually done)
RISK- E.g. Risk of misstatement

Question 2

Business risk

Answer 2

IDENTIFY RISK- E.g. data breach
IMPACT on operations e.g. Company will suffer reputational damage
SIGNIFICANCE OF RISK- Online based business will result in lack of trust and affect company structure/strategy.

Question 3

Identify additional info required from management

Answer 3

(1 mark per point and explanation)
-Copy of due diligence
-Info from 3rd parties
-Fin stmt’s to tie into figures
-Effect on accounts/figures per management
-Management reasoning/meeting minutes

Question 4

Design audit procedures to be performed

Answer 4

Action Source Objective
* Analytical procedures 2 bits of info Explain why?
* Enquire With mgmt? Explain why?
* Inspect Documentation Explain why?
* Observe Stock take Explain why?
* Recalculate Depn prov Explain why?
* Confirmation Bal with bank Explain why?
* Reperform Reconciliation Explain why?

Question 5

Ethical issues

Answer 5

Issues & safeguards
Identify issues
Significance
Safeguards
Eliminate or reduce to acceptable level

Question 6

Audit acceptance

Answer 6

1. Does client follow framework and mgmt accept responsibilities?
2. Acceptance consideration:
   * Overdue fees
   * Disagreements with management
   * Breach of law and reg’s
   * Professional clearance (if client doesnt agree- shouldn’t accept)

Auditors considerations
-Do we have the time (in schedule)
-Do we have the skills
-FEE (dont accept contingent work)

Audit & ethical risk considerations

Accept or Reject

Question 7

Profitability Ratios

Answer 7

GP Margin= (GP/revenue x 100%)
NP Margin= (NP/revenue x 100%)

Question 8

Efficiency ratios

Answer 8

Rec days= (Rec/revenue) x 365 Days to receive
Pay days= (Pay/purchases) x 365 Days to pay
Inv days= (Inventory/ Cost of sales) x 365 Inventory is held for

Question 9

Liquidity ratios

Answer 9

Current ratio= (Current ass/ Current Liabilities) 1.5-3 is good
Quick ratio=(Current ass-inv/Current liabilities) 1 above good

Question 10

Return ratio

Answer 10

Gearing ratio= Debt/equity

25-50% is comfortable to manage debt (anything above not good)

Question 11

If Fraud is found by auditor

Answer 11

1. Report to manager/partner
2. Consider evidence and report to top mgmt
3. Seek legal advice if mgmt involved
4. If material to FIn stmt’s - (Modify audit report to inform shareholders)

Question 12

Audit strategy

Answer 12

Scope- I.e timing, fee’s, materiality, risks…
Timing- Report deadline for AGM
Directions- Procedures required and samples/testing considered

Question 13

Materiality levels

Answer 13

Revenue= 0.5 - 1%
Total assets 1-2%
PBT 5-10%

Question 14

Planning section

Answer 14

1. Materiality calculation
2. Details from analytical review
3. Key audit risks
4. Background info regarding client
5. Laws and regs
6. Staff and budgets
7. Overall audit strategy
8. Deadlines for completion