Paper T8 (INT)

Certified Accounting Technician Examination

Advanced Level

Implementing Audit
Procedures
(International Stream)
Monday 14 June 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL TEN questions are compulsory and MUST
be attempted
Section B – ALL FOUR questions are compulsory and MUST
be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Section A – ALL TEN questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question in this section is worth 2 marks.

1 Which of the following is NOT a statutory right of the auditors of a limited liability company?
A A right of access at all times to the company’s books and records.
B A right to attend all directors’ meetings.
C A right to speak at general meetings on any matter that concerns them as auditors.
D A right to attend any general meeting.

2 What is the PRIMARY purpose of an auditor taking action to evaluate and test the internal controls of a limited
liability company?
A To enable the auditor to advise management of the strengths and weaknesses in the internal controls.
B To enable the auditor to eliminate analytical review procedures.
C To provide the auditor with the opportunity to reduce substantive procedures.
D To enable the auditor to restrict substantive procedures to income statement items only.

3 ‘Audit risk’ is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially
misstated.

Which of the following categories of risk can be controlled by the auditor?

Category of risk:
(1) Inherent risk
(2) Control risk
(3) Detection risk
(4) Sampling risk
A 1 and 2 only
B 1, 3 and 4
C 2, 3 and 4
D 3 and 4 only

4 Which audit working paper should provide satisfactory evidence that audit resources have been directed towards
high risk areas of an audit?
A Systems narrative notes.
B Systems flowcharts.
C Audit attention points brought forward from the previous period.
D The overall audit strategy documentation.

5 Which of the following should be facilitated by the standardisation of substantive procedure working papers?
(1) Meeting of specified audit objectives.
(2) Communicating with the staff of the audit client.
(3) Delegation of audit work.
(4) Review of audit work.
A 1 and 4 only
B 1, 3 and 4
C 2 and 3 only
D 1, 2, 3 and 4

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6 Which of the following types of internal controls does a small limited liability company normally have MOST
difficulty in implementing satisfactorily?
A Authorisation.
B Segregation of duties.
C Performance reviews.
D Information processing.

7 Which of the following strategies should give an auditor the STRONGEST assurance as to the existence of trade
receivables year-end balances in a company with weak internal controls over the sales and trade receivables
function?
A Carrying out a positive circularisation of receivable balances in respect of the year-end balances.
B Carrying out a negative circularisation of receivables balances in respect of year-end balances.
C Confirming receivables balances by agreeing to sales invoices, authorised delivery notes and valid order.
D Confirming receivables balances by verifying subsequent payments after the year end.

8 Which of the following financial indicators ratios on its own, provides the WEAKEST evidence of possible working
capital problems in a limited liability company?
A Trade receivables collection period.
B Quick (acid test) ratio.
C Gross profit margin.
D Trade payables payment period.

9 The auditor’s responsibility paragraph in an auditor’s report should describe an audit as including which of the
following:
(1) Reporting on whether the financial statements give a true and fair view.
(2) Reading other information contained in the annual report and considering whether it is consistent with the audited
financial statements.
(3) Evaluating the overall presentation of the financial statements.
(4) Evaluating the reasonableness of accounting estimates made by management.
A 1, 2 and 3
B 1 and 3 only
C 2, 3 and 4
D 3 and 4 only

10 Which of the following statements is TRUE with regard to an emphasis of matter paragraph included in a modified
auditor’s report?
A The paragraph should be included before the Opinion paragraph.
B The paragraph may refer to a matter other than those presented or disclosed in the financial statements that, in
the auditor’s opinion is relevant to users’ understanding of the audit.
C The paragraph should ordinarily refer to the fact that the auditor’s opinion is modified in respect of the subject
matter.
D The inclusion of the paragraph should not affect the auditor’s opinion on the financial statements.

(20 marks)

3 [P.T.O.
Section B – ALL FOUR questions are compulsory and MUST be attempted

1 Poppy Co produces games consoles from a large factory situated alongside its financial, administration and human
resources departments.
Felix Petal, Poppy Co’s financial director was appointed in February 2009 and he immediately took measures to
improve the company’s control environment as he recognised that most elements of it needed improving. For example,
the element of communication and enforcement of integrity and ethical values was particularly weak. Felix then
reviewed the control activities within each functional area of the business and introduced changes to help ensure the
achievement of control objectives. He is a strong believer in using computer produced exception reports to highlight
possible errors or omissions in processing, and changes introduced included the introduction of these reports wherever
appropriate.
Prior to Felix’s appointment, in November 2008, investigations into excessive factory wages payments as reported
in the company’s annual financial statements, revealed that the financial director at the time had authorised the
payment of wages to non-existent factory employees entered onto the company’s wages master file. The payments were
subsequently diverted into the financial director’s personal bank account. Whilst he maintained that the unauthorised
payments had been caused by a simple error, the financial director was dismissed from his employment with Poppy Co
on the grounds that he had committed fraud against the company.
Poppy Co has 124 factory employees including three production supervisors and a factory manager. The factory
manager has overall responsibility for all matters concerning the day-to-day operation of the factory. Except for the
production supervisors and the factory manager, all factory employees are paid for each hour worked on a weekly basis
in arrears. The former are paid on a monthly basis, together with all other employees through the company’s monthly
payroll.

Required:
(a) Identify and explain FOUR elements of the control environment of a limited liability company, other than that
of the communication and enforcement of integrity and ethical values. (8 marks)

(b) Define the term ‘fraud’ as applied to a limited liability company situation, and state the key distinguishing factor
between fraud and error, where an underlying action results in a misstatement of the financial statements of
a company. (3 marks)

(c) (i) Identify FIVE control activities that should exist to facilitate control over the recruitment of factory
employees through to the production of Poppy Co’s weekly payroll for factory employees.
Note: You are not required to identify automated controls built into the company’s wages application
software. (5 marks)
(ii) For each activity identified above, state the control objective. (5 marks)

(d) Identify FOUR different computer produced exception reports that could be used by Poppy Co’s management
to facilitate control over the weekly payroll for factory employees. (4 marks)

(25 marks)

4
2 Daisy Co trades as a golf club operator and owns six golf clubs spread throughout the country. Use of each club’s
facilities is restricted to members only, who all pay an annual membership fee; and all of the company’s clubs are open
for business 360 days each year.
The company earns the vast majority of its income from membership fees, green fees (payable for each round of golf
played), tournament fees, the hire of golf clubs and golf buggies and the hire of driving range facilities to members.
Additionally each club has a golf shop selling a wide range of golf clothing and equipment, a refreshment bar and a
café selling drinks and snacks.
Each revenue stream by club is shown separately in the company’s accounting records but all revenues are consolidated,
and reported as a single figure in the company’s annual financial statements.
Normally, there is some correlation between specific annual income streams in that when a given income stream is
relatively high or low then one or more of the other streams follows the same trend. Due to a very competitive market,
all prices charged by all of the company’s clubs have remained unchanged since July 2008. Similarly, the company
has always had a policy of allowing members to join and also to leave part-way through the year and therefore pay
proportionate annual membership fees.
In April 2010 your firm accepted instructions from Daisy Co to audit its financial statements for the year ending
31 August 2010. Prior to accepting these instructions, your firm obtained an understanding of various aspects of the
company and its environment, including its business operations. Further enquiries revealed that Daisy Co’s previous
auditors were a very reputable firm who had held the appointment since 1996 and who wanted to retain it.
Enquiries also revealed that the company appointed a new managing director Jed Thorn, in January 2010. Jed is
recognised as being very entrepreneurial and assertive with extremely ambitious plans to expand the company’s club
ownership over the next three years; relying on support from the company’s bank to finance any acquisitions from
existing operators.
Prior to acceptance of the instructions from Daisy Co your firm communicated with the company’s previous auditors
and subsequently issued an engagement letter to the company.

Required:
(a) Identify and explain FOUR matters that your firm may have considered when obtaining an understanding of
the business operations of Daisy Co. (8 marks)

(b) (i) Explain why it was necessary for your firm to communicate with Daisy Co’s previous auditors before
accepting the audit appointment. (2 marks)
(ii) State why your firm issued an engagement letter to Daisy Co as part of its engagement procedures.
(3 marks)

(c) Outline any concerns your firm may have with regard to Jed Thorn’s appointment as the managing director of
Daisy Co and also the timing of the decision to change the company’s auditors. (3 marks)

(d) (i) Explain why your firm would plan to rely on analytical procedures to provide assurance as to the
completeness of the income figure reported in Daisy Co’s financial statements for the year ending
31 August 2010. (3 marks)
(ii) Provide SIX examples of income stream relationships that could be used as a basis for comparing for audit
purposes, Daisy Co’s various income streams at each club for the 2010 financial year-end, to those of the
previous year. (6 marks)

(25 marks)

5 [P.T.O.
3 Your firm is about to commence the audit of the financial statements of Buttercup Co, a company that produces cakes
and pastries for sale throughout its various retail outlets. As part of a training exercise and also in preparation for the
forthcoming audit you have been asked to make presentations to your colleagues on:
(i) The need to consider the materiality of errors.
(ii) The likely issues arising when auditing trade payables and accruals as reported in the financial statements of
Buttercup Co.

Required:
In readiness for your presentation:
(a) State the matters that your firm should consider in determining whether an error, detected when carrying out
substantive procedures during the audit of Buttercup Co, is material. (5 marks)

(b) Explain the matters that your firm should consider in determining whether an error, detected when carrying
out tests of control during the audit of Buttercup Co, is material. (4 marks)

(c) Describe FOUR procedures that your firm should carry out to obtain assurance that trade payables and
accruals are not understated in Buttercup Co’s financial statements. (6 marks)

(15 marks)

4 Lily Co imports electrical goods from abroad and distributes them to various wholesale companies. It has a large
number of head office employees including an internal audit department that services the head office and also the
various storage and distribution depots located around the country. Lily Co owns its head office premises and all of its
depots. The internal audit manager reports to the company’s financial director who has ultimate responsibility for the
effective and efficient operation of the internal audit department.
At a recent meeting between Lily Co’s chairman and representatives of the company’s auditors, the chairman enquired
as to why they could not place more reliance on the work carried out by the internal audit department when carrying
out their own external audit procedures. In their response the auditors made reference, amongst other matters, to an
‘experienced auditor’ and ‘independence of the internal audit function’.

Required:
(a) Define the term ‘internal auditing’. (2 marks)

(b) Identify and explain THREE matters about which the internal audit manager should have a reasonable
understanding, if she is to meet the recognised criteria of being an ‘experienced auditor’. (6 marks)

(c) Explain why it is important for an internal audit function to be ‘independent’ and state why Lily Co’s financial
director should not have responsibility for the effective and efficient operation of the company’s internal audit
department. (7 marks)

(15 marks)

End of Question Paper