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AUD812S-ADVANCED AUDIT-1ST OPP-NOV 2024 |
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nArnlBIA UnlVERSITY
OFSCIEnCE Ano TECHn OLOGY
FACULTYOF COMMERCEH, UMANSCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING & FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING (HONOURS)
QUALIFICATION CODE: 0SBOAH
COURSE CODE: AUD812S
LEVEL: 8
COURSE NAME: ADVANCED AUDIT
SESSION: NOVEMBER 2024
DURATION: 3 HOURS
PAPER: THEORY AND APPLICATION
MARKS: 100
FIRST OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINERS:
Dumisani R. Muzira
MODERATOR: Marko Tondota
INSTRUCTIONS
• This question paper is made up of FOUR(4) questions.
• Start each question on a new page.
• Answer All the questions and in blue or black ink.
• You are advised to pay due attention to expression and presentation. Failure to do so will
cost you marks.
• Start each question on a new page in your answer booklet and show all your workings.
• Questions relating to this paper may be raised in the initial 30 minutes after the start of
the paper. Thereafter, candidates must use their initiative to deal with any perceived error
or ambiguities and any assumption made by the candidate should be clearly stated.
PERMISSIBLE MATERIALS
Non-programmable calculator/financial calculator
THIS QUESTION PAPER CONSISTS OF 5 PAGES (Including this front page)
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Question 1
(25 marks)
R & R is a listed construction company with annual sales of $350 million and its draft income
statement shows profit from operations for the year ended 31 December 2022 of
$40 million. This is the first audit by this audit firm. Enquiry of the previous auditor revealed no
reasons for concern. On completing audit work at the company's premises, the audit senior
drafts a memo, extracts from which are reproduced below:
(a) Inventory valuation
Inventories include $7 million, at cost, of scrap rubber. This material is widely used as a road
surface in other countries. Contracts for road building with this country's Highways Agency,
the state authority for road construction, do not currently permit the use of this material.
However, the matter was known to be under review and, on being offered a special purchase
of this material, R & R speculated on a favourable outcome of the review and purchased the
material. In February 2023, shortly before the financial statements were approved by the
directors, the Highways Agency reported that it would not, currently, accept the use of this
material. If used on non Highways Agency contracts the material's net realisable value would
not exceed $2 million. The chieffinancial officer maintains that, as the Highways Agency report
was issued after the balance sheet date, the write down of the inventory should be reflected
in the next period's financial statements. (10 marks)
(b) Depreciation
In 2018 the company purchased two computer-controlled earth movers at a cost of $2,500,000
each and a further two at the same price in 2019. Depreciation has been provided at 10%
straight line, the same basis as it previously depreciated conventional earth movers. This year,
2022, the company decided that improvements in technology made it worthwhile scrapping
their first two computer-controlled movers and replacing them with the latest model at a cost
of $4,000,000 each. The company's chief engineer tells you that technology is developing so
rapidly it appears likely they will continue to replace these machines every five years. The
chief financial officer claims that the depreciation rate of 10% is in line with industry standard
and reflects the physical life of the machines. He argues that continued improvements in
technology cannot be foreseen and that there is no justification for increasing depreciation to
20% because of the possibility of technological obsolescence. (15 marks)
Required
Explain the effect of each matter on:
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a) the financial statements and
b) if the company were to refuse to amend the financial statements, on the auditor's
report. (Your answer should consider materiality where appropriate).
Question 2
(25 marks)
a) The engagement partner assigned to the audit of Dee Ltd is married to the CEO of
Dee Ltd. The CEO of Dee Ltd receives a bonus based on profits.
Required:
Describe the ethical concerns prior to accepting Dee Ltd as a statutory client.
(5)
b) How can management use the fraud diamond theory to prevent and detect fraud (20)
Question 3
25 marks
"It is astonishing to note how Arthur Andersen could miss such an elementary fraud. It was
maybe the simplest fraud that could have been detected easily by anyone who cared to look
carefully at the accounts. WorldCom hired Andersen to perform a standard audit, not a fraud
audit. Although WorldCom fraud was a straight forward lie that would not have been possible
without the involvement of the entire group, the fraud could have been missed. To save their
skin, Andersen blamed Sullivan for withholding information during the audit. However, when
they discovered that certain expenses had been reported as investments, Andersen
immediately announced that their reports on WorldCom's financial statements for 2001 should
not be relied upon. Ultimately, WorldCom had to go for bankruptcy which was the biggest
bankruptcy in the world to date. Immediately after the bankruptcy, 17 000 employees were
laid off. Sullivan was fired and ultimately arrested for the accounting manipulations."
Adapted from the paper on Ethics In Accounting by Dr. Lucian Cernsca
REQUIRED:
a) Explain 'professional skepticism' in auditing.
(5)
b) Describe substantive analytical procedures that could be used to give evidence on the
following assertions:
(20)
(1) Completeness of accruals
(2) Accuracy of overdraft interest expense
(3) Accuracy of wages expense
(4) Cut-off of sales revenue
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Question 4
(25 Marks)
Gamston and Keyworth
International Standard on Auditing 700: The Auditor's Report on Financial Statements
standardises the contents of the audit report and the form of qualified reports.
Your firm is the auditor of the following two companies, and you have been asked to consider
the form of qualified or unqualified audit report which should be given.
a) Gamston Burgers has a loss-making branch and it has included non-current assets
relating to the branch at $710,000 after deducting an allowance for impairment in value
of $250,000. The directors believe that if operating changes are made and economic
conditions improve, there is a reasonable probability of the branch trading satisfactorily,
which will result in the current value of tangible assets exceeding $710,000. However,
under the current circumstances, the directors consider the extent of any impairment in
value to be uncertain. You have obtained all the evidence you would have reasonably
expected to be available.
If trading conditions do not improve, your audit investigations have concluded that the
branch will have to close. If the branch closes, the tangible assets will be worthless, as
the property is leased and the cost of moving any tangible assets will be more than their
net realisable value. If the tangible assets are worthless, you have concluded that the
effect will be material, but it will not result in the financial statements being misleading.
(b) Keyworth Supermarket sells food to the general public and customers pay in cash or
by cheque. Your audit tests reveal that controls over cash takings and custody of the
inventory are weak, and you have not been able to obtain sufficient evidence to quantify
the effect of any misappropriation of inventory or cash takings. You have concluded as follows:
i. If the uncertainty relates to all the company's sales, it could result in the financial
statements being misleading
ii. If the uncertainty relates to only the sale of fresh fruit and vegetables, which
comprise 10% of the company's sales, it will have a material effect on the financial statements
but it will not result in them being misleading.
Required
(a) List and briefly describe the contents of an unqualified audit report. (9 marks)
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b) Give the form of an unqualified or qualified audit report you would give
in each of the following situations and support your opinion:
(i) On the financial statements of Gamston Burgers if you agree with the directors'
statements about the uncertainty relating to the value of the tangible assets of the branch.
(ii) On the financial statements of Gamston Burgers if you have come to the conclusion that
trading conditions will not improve and the company will close the branch. Thus, the tangible
assets will be worthless.
(iii) On the financial statements of Keyworth Supermarket if the uncertainty about the
misappropriation of inventory and cash takings relates to all the company's sales.
(iv) On the financial statements of Keyworth Supermarket if the uncertainty about the
misappropriation of inventory and cash takings relates only to the sale of fresh fruit and
vegetables which comprise 10% of the company's sales. (16 marks)
THE END
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