Mock final

Audit and Assurance

Answers & Marking Scheme

Skans School of Accountancy (B)

®
 Section A

Question Answer Mark

1 A 2
2 B 2
3 C 2
4 D 2
5 C 2
6 A 2
7 A 2
8 B 2
9 B 2
10 A 2
11 C 2
12 A 2
13 A 2
14 B 2
15 D 2

Item Answer Justification

1 A (1) The company needs to have at least three non-executive directors to balance the
three executive directors (managing, finance and marketing) and on appointment the
chairman should be independent (3). (2) is not appropriate as the roles of the CEO
and chairman should not be held by the same individual. (4) is unlikely to be practical
as it would likely reduce the strength and functionality of the board. It is best to keep
the executive level at three and have a balanced board structure in accordance with
good corporate governance.

Tutorial note: The principle here is that the board should have a strong presence of
both executive and non-executive directors so that no individual or small group can
dominate its decision-taking. Thus, at least half the board, not counting the chairman,
should be independent non-executive directors.

2 B The audit committee should consist of at least three independent non-executive

directors.

Tutorial note: For small companies two might be sufficient and could include the
chairman, provided he does not chair the audit committee (so not A as Martin Co is
not small). Although the board should be satisfied that at least one member of the
committee has recent and relevant financial experience this could not be the finance
director as he is not independent (so not C). Balancing the roles of executive and non-
executives (D) is a principle relating to the composition of the board; not the audit
committee.

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3 C The UK Corporate Governance Code requires a board to have three committees:
remuneration, audit and nomination. The remuneration committee will have
delegated authority to set executive pay. By contrast, the nomination committee will
usually make recommendations to the full board (which has the final decision).

Tutorial note: If Martin Co does not establish a risk committee the risk function
should be carried out by the audit committee or the board itself. The executive
management and human resources committees are outside of the scope of corporate
governance. They are internal committees established by the entity.

4 D Internal auditors may assist the auditor in obtaining an understanding of internal

control and in performing tests of controls and substantive tests. For example,
internal auditors will document and test controls and carry out substantive tests (e.g.
existence of non-current assets). However, the external auditor cannot accept the
work of internal audit without conducting their own tests to determine how reliable
the internal audit work is on those areas of interest to the external auditor. All
material items MUST be audited primarily by the external auditor.

5 C An assurance report does not “attest(s) to the correctness of the information being
reported upon” (3). Even a reasonable assurance engagement (which gives more
assurance than a limited assurance engagement) does not provide a guarantee that the
information being reported on is correct. Assurance can never be absolute as this
statement implies. All the other statements are relevant to assurance reports.

6 A As the audit senior’s husband is a member of her immediate family and has a direct
interest in the audit client, the senior should not be assigned to the audit.

Tutorial note: If the senior was in fact a partner, her husband’s shares would need
to be quickly sold. However, Cedric & Co could not implement this – if the husband
refused, either she would need to resign from the firm or the firm would need to resign
from the assignment. As Sharon Co is a listed client, quality control procedures would
automatically require an independent review of the audit files, so this is not a
safeguard “in relation to the investment”.

7 A (1) The audit partner will be familiar with the firm’s audit procedures and the
previous audit work carried out on the client. He will also be familiar with/to the
audit team members. There could be a self-interest threat if the audit partner was
aware of a possible offer during the audit (but not indicated in the scenario). Going
forward there may also be an intimidation threat (from the partner to the audit
team/firm) should the partner become finance director.

(2) Completing the audit for the same fee and saving one week in chargeable time is
a self-interest threat as that week can then be used as chargeable time on other clients.
There is also an incentive to cut corners and reduce the level of necessary audit work
that could lead to an intimidation threat.

(3) Providing other services (i.e. the actuarial valuation) to a client that will then be
subject to review as part of the assurance engagement is a self-review threat.

(4) As the senior’s husband is an immediate member of her family, there is a clear
self-interest threat. This is enhanced by the fact that the senior is in a position to have
some influence over the outcome of the audit.

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8 B As Sharon Co is a listed company any valuation that will be material (regardless of
subjectivity) to the financial statements cannot be made by the audit firm.

Tutorial note: If it was not material then a valuation could be made with
appropriate safeguards (not offered as an option).

9 B As this will involve confidentiality, the client’s permission to reply must be obtained.
After this has been obtained, correspondence with the other professional may be
made.

Tutorial note: Ignoring the request is not professional and may lead to a complaint
against Cedric & Co. Lodging a complaint to the ACCA against the other firm may
be a possibility if the other firm fails to follow the appropriate professional
requirements (not implied in the scenario).

10 A The fact that the client is seeking a second opinion on the potential opinion may place
Cedric & Co under immediate direct pressure to reconsider their opinion and issue an
unmodified opinion.

Tutorial note: Actual or threatened litigation from the client or shareholders seems
highly unlikely as there is no indication that Cedric & Co has been negligent. Unpaid
fees may become a threat at some time in the future, but not immediately. The scenario
does not give any indication of how long Cedric & Co has been the auditors of Essex
Co.

11 C

12 A The Basis for Qualified Opinion section of the auditor’s report, will state that a
material uncertainty exists which is not adequately disclosed in the financial
statements. Although clearly material, the lack of full disclosure (i.e. some
disclosure is made) is not pervasive.

Tutorial note: An adverse opinion might be expressed when a material uncertainty

has been identified but is not disclosed (at all)

13 A Where a going concern issue is fully explained and disclosed in the financial
statements, attention is drawn to this fact through a separate section “Material
Uncertainty Related to Going Concern” rather than an emphasis of matter paragraph.

14 B The scenario clearly points towards material issues that affect both the statement of
financial position and the statement of profit or loss and are most likely to be
considered pervasive. (The scenario specifically rules out any going concern issues.)

Tutorial note: The pervasive nature of potential adjustments is suggested by the fact
that investments (and income therefrom) will be very significant to a “financial
investment company”. Investments may be variously classified which would affect
multiple line items in the statement of financial position and the makeup of the
significant loss (e.g. fair value adjustments and impairment losses) would affect the
reporting of various line items in both profit or loss for the year and other
comprehensive income. Further, the continuing collapse of market values after the
year would presumably require some disclosure on non-adjusting events after the
reporting date in the notes to the financial statements.

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15 D Where matters involve significant estimation uncertainty or are complex in nature (1
and 5) they are usually considered to require significant audit attention. All of the
other issues may be dealt with through standard audit procedures; doubts about going
concern (2) are dealt with in a separate Going Concern statement and lack of
disclosures (3), valuation of raw materials (4) and inappropriate application of the
financial reporting framework (6) through an audit opinion modification.

Section B

16 PLAZA HOTELS CO

(a) Inherent risk and control risk

Inherent risk is the susceptibility of an assertion about a class of transaction, account balance
or disclosure to a misstatement which could be material, either individually or when aggregated
with other misstatements, before consideration any related controls.

Control risk is the risk that a misstatement which could occur in an assertion about a class of
transaction, account balance or disclosure and which could be material, either individually or
when aggregated with other misstatements, will not be prevented, or detected and corrected, on
a timely basis by the entity’s internal control.

Both (along with detection risk) are components of audit risk. When combined, inherent risk
and control risk constitute the risk of material misstatement in the financial statements. The
auditor is required to assess the risk of material misstatement and respond to that risk as the
basis for determining the nature, timing and extent of audit work (detection risk) to reduce audit
risk to an acceptable level.

For example, if there is a high level of inherent risk associated with a financial statement area
and the entity’s internal controls over that area are weak (i.e. control risk is also high) the overall
risk of material misstatement is high. The auditor will need to reduce the risk of not detecting
material misstatements (and thereby forming an inappropriate audit opinion on the financial
statements) by performing extensive relevant substantive procedures. These will typically be
carried out in a final audit conducted after the year.

If there appear to be internal controls on which the auditor believes he can rely, the auditor must
undertake tests of those controls. If these tests confirm that the controls are operating effectively
the auditor should be able to reduce the level of detailed substantive procedures (e.g. reduced
sample sizes) that would otherwise be required as the risk of material misstatement is lower.
Tests of control are typically undertaken during an interim audit, before the year end.

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(b) Audit risks and responses
Audit risk
At the year end there will be inventory and
cash counts (carried out by the external
specialists, Courteous) at each of the eight
hotel locations. The auditor expects to attend
and observe only half of the physical counts.
There is a risk that material errors may arise
over the inventory/cash counting procedures
and the completeness, accuracy and existence
of inventory and cash for any hotels not
attended by the auditors.
. by Courteous should be carried out to
The finance director has changed some of the
general controls over the computerised
accounting system. There is a control risk that
these changes may reduce the effectiveness of
the overall control framework and increase
audit risk.
The company has a high level of cash-based
transactions. There is a risk that cash will be
misappropriated leading to cash balances in
the financial statements being understated.
There is a risk that revenue and expenses will
be understated if cash income is not recorded
but used to pay for expenses (e.g. for casual
workers).
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Auditor response
The auditor’s understanding of the ability of
Courteous to carry out the counts should be
updated to take into account any issues that
arose during the year.
The auditor should assess which of the
hotels they will attend to observe the
physical counts (e.g. those with material
inventory or which have a history of
significant errors).
A review of the monthly reports submitted
identify any particular issues that are
specific to a hotel or general across all
hotels.
For those hotels not visited, the auditor will
need to review the level of exceptions noted
during the counts by Courteous and discuss
with management and Courteous any issues
which arose during the count. Specific
attention should also be paid to the
analytical review covering those hotels not
visited.
The auditor must document the changes (and
confirm with a walk-through to assess
design and implementation) and assess their
impact on controls over the computer
system. The auditor should plan to perform
appropriate tests of control (which should be
modified from the previous year’s audit). If
weaknesses are identified, extended
substantive testing will be necessary.
Tests of control should be undertaken to
confirm that controls over cash have been
operating effectively (e.g. to ensure that all
cash received is recorded and banked intact).
The monthly cash work carried out by
Courteous should be reviewed and opening
cash balances reconciled via the reports
from Courteous to the year-end audited cash
counts and balances.
Substantive analytical procedures should be
performed on revenue/expenses (e.g. by
income/expense stream, month and hotel
compared with prior years) and the reasons
for any decline investigated.
6
 Audit risk
Annual bonuses are made to directors and
hotel general managers based on the profits of
the company and each hotel. There is a risk
that revenue will be overstated and expenses
understated by the directors and general
managers to maximise their bonus.
There is a risk that capital and revenue
expenditure on the new hotel and hotel
extensions will be incorrectly classified.
Understatement of revenue expenditure will
also impact the risk that annual bonuses will
be overstated.
Similarly, the ongoing repairs, maintenance
and replacement programmes for furnishings
and equipment further increase the risk that
capital and revenue expenditures have been
incorrectly classified.
There is a risk that property, plant and
equipment will be overstated if the carrying
amounts of replaced assets are not removed
from the statement of financial position.
In addition, there is a risk that depreciation
and profits or losses on disposals could be
mis-stated if disposal proceeds are not
accounted for.
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Auditor response
Control and transaction tests on revenue and
expenses.
Detailed tests for unrecorded liabilities and
cut-off tests on purchases and revenue
should be performed at the year end.
Substantive analytical procedures on the
breakdown of revenue and costs by facility
(e.g. restaurant, accommodation,
conference) and the reasons for any unusual
activity investigated.
Review a breakdown of the costs of
construction to ascertain the split of capital
and revenue expenditure. Substantive
testing (e.g. examining contractors’
invoices) should be undertaken to ensure
that the classification in the financial
statements is correct and that the
expenditure has been accurately recorded.
Confirm completeness of recording of any
outstanding liabilities relating to the
construction (e.g. by examining invoices and
cash book payments after the year end).
The auditor should review a breakdown of
repairs and maintenance accounts and
confirm to invoices that expenses are not of
a capital nature. Substantive analytical
procedures should be performed by hotel.
All material assets recorded in the records of
the company as at the year end should be
physically inspected to confirm their
existence and condition.
Undertake tests of control over the disposal
of assets (e.g. that the disposals and the
purchases of replacement assets are
authorised) and detailed tests on the
completeness of disposals (together with
asset existence) and proceeds accurately
recorded in cash book receipts.
Undertake tests to ensure that the profit or
loss on disposal of material non-current
assets have been correctly calculated and
accounted for (noting potential impact on
directors’ bonuses).
7
 Audit risk Auditor response

Because of the nature of non-current assets in
a hotel, there is a risk that they may be
misappropriated and non-current assets will be
overstated and losses understated in the
financial statements.
Carry out tests of control on the hotels’
controls over such items. For example,
inspecting a sample of housekeeping reports
showing that rooms were checked while
guests were settling their bills on leaving.
Tutorial note: Room inspections would
also cover, for example, mini-bar contents
to ensure usage has been charged, any
damage to furniture/fittings/materials and if
any guest items have been left in the room.

The compensation claim arising from food
poisoning will require a provision in the
statement of financial position (since payment
is likely). There is a risk that this provision
could be materially misstated.
Obtain a direct confirmation letter from
Plaza’s legal advisor. Discuss with the
managing director to ascertain whether, for
example, Plaza expects to offer an out-of-
court settlement (which, if accepted, would
be certain) or contest the claim.

Developments in the case should be

monitored throughout the audit. If
settlement is not made (paid) or agreed in
writing before the financial statements are
authorised for issue the estimate of the
provision must be included in a written
representation from management.

(c) Fraud

(i) Auditor’s responsibility

The auditor’s responsibility relating to fraud or other irregularities is to obtain reasonable

assurance that the financial statements are free from material misstatement, however caused (by
fraud, other irregularity or error). Primary responsibility for prevention and detection of fraud
or other regularity (and error) lies with management and those charged with governance, not
the auditor.

(ii) Types of fraud

Although there are many forms of fraud, only two basic types will result in a misstatement of
financial statements (and therefore will be of interest to auditors) – fraudulent financial
reporting and misappropriation of assets.

Fraudulent financial reporting involves misstatements or omissions of amounts or disclosures

intended to deceive users of financial statements. For example, the former directors may have
deliberately overstated revenue because their bonus incentives were based on reported profit.

Misappropriation of assets includes the theft or misuse of company assets. For example, the
former directors could have stolen cash (embezzlement) and been in a position to conceal the
loss through the falsification of records or documents.

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 Tutorial note: Other examples which might be suggested by the scenario should be awarded
credit. For example, they could be involved in the theft of portable assets or selling replaced
assets for their own gain.

(iii) Effect of the finance director’s comments

The auditor should exercise a higher level of professional scepticism to minimise the
unavoidable risk that material misstatements resulting from fraud may not be detected (due to
the inherent limitations of an audit). Even if the previous matter has been resolved Adam may
be subjected to undue pressure and influence, by the managing director, that could result in
fraudulent financial reporting. Aggressive and dominating behaviour is often an indicator of the
fraudster (e.g. the managing director) “warning off” enquiries that are getting too close to the
truth.

Fraud indicators and the fact that there may have been a fraud should be discussed in the
engagement team meeting (between the audit manager, senior and key members of the audit
team) and documented as a significant matter. Team members not involved in the discussions
must be informed of the outcomes and specific effects on areas relevant to their responsibilities
(e.g. through the audit plan or work programmes).

Tutorial note: It is a requirement of ISA 240 The Auditor’s Responsibilities Relating to Fraud
in an Audit of Financial Statements that the key members of the audit team must discuss and
assess the entity’s financial statements susceptibility to fraud. Clearly Adam’s comments must
be addressed.

Samples for tests of controls and tests of details should be selected from transactions before and
after the managing director was replaced in February. Team members should be particularly
alert to “reversing” transactions (e.g. credit notes) significant transactions signed as authorised
by only the former director and unusual, unsupported journal entries.

If authorisation controls exercised by the former director appear to have been abused the auditor
must re-assess control risk and modify the plan (e.g. increase tests of details).

When undertaking substantive analytical procedures the auditor should consider the extent to
which unexpected variations might be attributed to fraud. For example, increases in bar
revenues after February could signify that cash was being stolen before this time.

Tutorial note: The requirement only related to the effect on the current year’s audit. Although
knowledge of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” is not
assumed for F8 (as it is not examinable in F3) students would be given credit for stating that if
any material misstatement was identified in the prior year’s financial statements (through audit
work for the current year) this would be reported as an adjustment against opening retained
earnings in the statement of changes in equity.

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17 RETTA KITHCHENS CO
(a) Non-current asset purchasing system
Deficiencies
Robert, the buyer, determines both the
budgeted price for each capital expenditure,
as well as the actual price paid when the
purchase is completed. The capital
expenditure budget could include inflated
purchase prices in breach of the company’s
policy to include only lowest confirmed
prices. This could lead to a false impression
of the buyer’s subsequent efficiency in
acquiring assets at favourable prices.
Non-current assets are acquired in months as
budgeted irrespective of actual requirements,
and without the specific request of the
relevant functional director. This could result
in an unnecessary drain on cash flow, non-
utilisation of acquisitions and losses due to an
inefficient acquisition policy.
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Control recommendations Test of control
An approved supplier list should be Review a sample of cost estimates from
compiled; this should take into account the suppliers and confirm that they are on the
price of goods, their quality and also the approved list and that the cost estimates were
speed of delivery. reviewed and authorised by the managing
director.
Documentation showing that the buyer
obtained cost estimates from a range of
approved suppliers should be reviewed and
authorised by the managing director before
the lowest cost estimates are presented to the
directors in December.
Assets should be acquired only on the Review a sample of processed capital
specific request of the relevant functional expenditure requisitions and confirm that they
director. Signed purchase requisitions should are signed by the relevant functional
be submitted to and authorised by the direction, specify the reason for purchase and
managing director stating the reason for the authorised by the managing director.
expenditure (e.g. as budgeted – old asset
beyond economical repair). A copy of the
requisition should be retained and matched
with the subsequent purchase order (see
below).
10
 Deficiencies
Newly-acquired assets that are not put into
immediate use may be exposed to a risk of
theft, particularly if they are desirable and
portable (e.g. laptop computers).
The capital expenditure budget and approved
acquisitions schedule do not address the
control and disposal of assets replaced. If
assets being replaced are not planned to be
disposed of, the company could lose material
sundry income.
Orders are placed informally by email or
letter. Without documentary evidence, there
is an increased risk that warehouse will
accept delivery of unauthorised assets or that
the accounts department will pay for
unauthorised assets. Purchasing errors are
also more likely (e.g. duplicating orders).
The buyer’s remuneration package could
result in purchasing decisions that are not in
Retta’s best interests (e.g. buying an inferior
model at a cheaper price).
©2016 DeVry/Becker Educational Development Corp. All rights reserved.
Control recommendations
Assets should only be acquired for the time
they are to be used.
A non-current asset register should be
maintained to record all acquisitions,
commencement of use and disposals of
capital items.
Planned disposals of assets to be replaced
should be incorporated in the capital
expenditure budgeting process to include
approval and control over setting disposal
prices and receiving disposal proceeds.
The buyer should raise multi-part sequentially
numbered purchase orders after the receipt of
authorised purchase requisitions. One
purchase order copy should be forwarded to
the warehouse (goods received area) and
another to the accounts department for
checking against the goods received and the
supplier’s invoice.
The bonus should only be authorised by the
managing director after the relevant
functional directors confirm that the specified
assets have been put into use and that they are
fit for purpose.
11
Test of control
Agree that the time period between receipt of
the asset and when it is put into use is
minimal.
Inspect the register for evidence of regular
review by the managing director and checks
being carried out (e.g. last inspection
date/date of disposal).
Review the capital expenditure budget to
ensure that replaced assets are correctly
identified, authorised for disposal, proceeds
received and accounted for (including
recording in the asset register).
Review a sample of purchase orders for
evidence of matching with authorised
purchase requisitions, goods received notes,
entry into the asset register, the supplier’s
invoice and payment (e.g. copies attached or
referenced in a grid stamp).
Review each monthly bonus entitlement
calculation for evidence that the managing
director has received confirmation from
functional directors that the acquired assets
are fit for purpose.
(b) Non-current asset register

Retta’s non-current asset register should provide an up-to-date record of all non-current assets
owned by the company. The format of the register should allow for the groups of assets (e.g.
factory plant and equipment, vehicles and office furniture) as reflected in the company’s general
ledger, to be identified by individual asset such that at any point in time reference may be made
to individual assets as appropriate.

Typically, the register should record date of acquisition, expected useful life, cost, depreciation
and carrying amount with identifying details (e.g. serial number) and location of asset. Such
information should provide management with the means of maintaining control over the use,
safe custody and replacement of assets, some of which will be transportable, valuable and
desirous and by their nature possibly subject to misuse or misappropriation.

The register should be updated by individuals who are separated from the acquisition, custody
and disposal of assets. In order to maintain effective control, it is important that checks are
regularly carried out both from the register to assets (to ensure existence and condition) and
from assets to the register (to ensure completeness of recording). These checks should be
performed by a responsible individual, who is independent from the acquisition custodian,
disposal and recording functions. Any discrepancies and damage noted when checking must be
brought to management’s attention and promptly investigated with appropriate follow up
action.

(c) Disposals

Tutorial note: The requirement was only for completeness. Any tests based on valuation,
accuracy and cash proceeds will not earn marks.

Obtain a schedule of non-current asset disposals by category. Cast the schedule and agree the
total to the general ledger and the financial statements (including disclosures).

Incorporate the testing of this schedule for completeness of disposals with the audit test for
existence.

Select a sample of material items to test for existence from opening balances plus additions for
the year. For items that cannot be found, agree their inclusion in the schedule of disposals. If
not on the schedule, identify and verify that the item was disposed of after the year end (and
note on the Matters for Attention of Next Year’s Audit schedule). If no evidence is available of
post year-end disposal, discuss with management why the asset cannot be accounted for and
that the list of disposals is understated.

Tutorial note: Marks will be awarded to candidates who use the asset register as the basis for
their sample selection provided detail is given on testing the completeness and accuracy of the
asset register.

12
18 POEHLER CO

(a) Substantive procedures

Tutorial note: The requirement asks for substantive procedures that should be performed “at
the end of the year” relating to specific financial statement assertions. The assertion of
“accuracy, valuation and allocation” means that assets and liabilities are included at
appropriate amounts and any resulting valuation of allocation adjustments are appropriately
recorded.

Allowance for irrecoverable debts

 Agree the total ($56,000) of the loss allowance to underlying working papers
showing its make-up (e.g. expected credit losses on specific customers’ accounts
and a further, general allowance).

 Review customer correspondence files, solicitors/legal correspondence and results

of the direct confirmation of trade receivables (if carried out) for evidence of
irrecoverable debts not included in the schedule.

 Compare the current year’s schedule with the prior year’s. Enquire into the reasons
for significant balances now being included and why balances still included have
not yet been written off.

 Confirm the accuracy of the aged-receivables ledger listing (on which any general
allowance is based) by test checking actual cash receipts against earlier invoices
raised. (CAATs could be used to produce an aged listing for comparison and also
for matching after-date cash receipts.)

 Review the aged listing and compare with the allowance for irrecoverable debts;
enquire into any long-overdue receivables balances not included in the allowance.

 Examine customer receipts after the reporting period and confirm that they do not
relate to account balances included in the schedule of irrecoverable debts.

 Examine credit notes issued after the reporting period to identify any balances
erroneously omitted from the irrecoverable debts schedule.

 Use CAATs, as appropriate, to interrogate system for long outstanding receivable

balances and unusual credit entries posted to accounts.

Tutorial note: Credit will be given for the appropriate use of CAATs provided sufficient
explanation is given. Just saying “Use CAATs to do xxx ” without any explanation will obtain
very few, if any, marks.

13
Accounts payable

 Agree the balance ($315,000) to the balance on the trade payables control account
and the total of the list of balances extracted from the trade payables ledger.

 If the control account balance does not agree with the total of the list of balances,
obtain the reconciliation and confirm the make-up of the reconciling items to
underlying working papers/schedules.

 Carry out analytical procedures and make enquiries as appropriate, ensuring that the
54% increase on previous year balance makes sense taking all matters into account.

 Select an appropriate sample of suppliers for supplier statement confirmation.

Carry out reconciliations of the sample of suppliers’ statements to account balances
in the payables ledger balances, comparing to those prepared by Poehler’s staff.

 Review cut-off procedures for goods received and recognition of amounts payable
at 30 April 20X7.

 Review unmatched goods received notes (i.e. goods received but associated invoice
not received at 30 April 20X7) and confirm inclusion in the trade payables total.

 Review material after-date payments to identify any liabilities not recorded at the
year end.

 Use CAATs as appropriate to identify for further investigation, long outstanding

account balances including those with no recent activity and accounts containing
unusual debit entries.

Accruals

 Obtain a schedule showing the breakdown of the total ($37,800) and recast it.

 Compare the breakdown with the prior year schedule and make enquiries as
appropriate, ensuring that the 40% decrease makes sense taking all matters into
account.

 Compare budget expenditure with actual reported expenditure in the statement of

profit or loss and enquire into whether any reported under-spend(s) could be
represented by omitted/erroneous accruals.

 Review expenditures and postings to the general ledger after the reporting period,
paying particular attention to known accrual expense accounts, to identify possibly
omitted/erroneous accruals.

 Use CAATs and manual procedures as appropriate, to compare expense heading

relationships to sales or other appropriate measures for current year to those of
previous year to identify possible omitted/erroneous accruals.

 Identify any round sum amount accruals; make appropriate enquiries and examine
supporting documentation (e.g. expense invoices received after the year end) to
confirm their validity.

14
 Provision

 Discuss the nature and amount of the claim with senior management and the basis
on which $81,000 has been provided.

 Read relevant correspondence (including legal correspondence) relating to the claim

for damages and compare the amount provided for with the expense in the statement
of profit or loss and the estimates and opinions available.

 Examine the minutes of board meetings to obtain substantiating evidence as to the

existence and nature of the claim.

 Scrutinise appropriate expense accounts to identify expenditures already incurred in

connection with the claim and costs possibly duplicated in the year-end provision.

 With the directors’ permission write to the company’s legal advisers to confirm the
likelihood of Poehler having to settle the claim and the likely value of the claim.

 Form an auditor’s expectation of the amount of and need for a provision. If

materially different from that of management, discuss the reasons why with
management (apply professional scepticism).

(b) Direct confirmation of accounts payable

(i) Why auditor may decide NOT to carry out

An auditor must achieve a balance between the requirement to obtain sufficient appropriate
audit evidence and the requirement to complete the audit on a timely and economic basis.

Third party evidence is a good source of audit evidence and a large proportion of the
documentation available when auditing trade payables is produced by third parties (e.g.
suppliers’ invoices, statements and correspondence).

Consequently, in the normal course of events, provided there is sufficient appropriate audit
evidence available from other sources, the auditor may decide that there is no need to carry out
a direct confirmation of suppliers (trade payables).

(ii) Appropriate situations

 Required suppliers’ statements are, for whatever reason, unavailable.

 The auditor considers the understatement of trade payables to be a high risk.

 Only copies (not originals) of suppliers’ statements are available and there is some
doubt about their authenticity.

 The auditor or the company suspects fraudulent manipulation of payments to

suppliers.

 The auditor is of the opinion that he cannot place any reliance on internal controls
over the company’s purchases system.

Tutorial note: Only TWO situations were asked for.

15
 Marking Scheme

Marks available Marks awarded

16 PLAZA HOTELS CO

(a) Definition of inherent risk 1

Definition of control risk 1
Generally 1 mark per point explaining relevance
to each of nature, timing and extent to a max of 3
–––
5
–––
(b) Audit risks and responses (only 7 risks required)
Multiple locations 2
General controls – changes 2
Bonuses 2
Cash susceptibility 2
New construction 2
Repairs and renewals 2
Portable non-current assets 2
Compensation claim 2
–––
Max 7 issues, 2 marks each 14
–––
(c) (i) Auditor’s responsibility for fraud 2
(ii) Types of fraud
Fraudulent financial reporting max 2
Misappropriation of assets max 2
(½ mark for mere mention or 1 mark for clear
explanation + 1 mark for relevant example)
(iii) Discussion of effect on strategy
Professional scepticism 1
Engagement team discussion 1
Documentation of significant matter 1
Tests of control 1
Analytical procedures 1
–––
5
–––
Total marks 30
–––

16
17 RETTA KITCHENS CO

(a) Control deficiencies, recommendations and tests of controls (only 4 issues required)
Capital expenditure budgeting process 3
Purchase requisitioning 3
Newly-acquired assets 3
Purchase ordering 3
Buyer’s remuneration 3
–––
12
–––
(b) Non-current assets register
Description of structure/contents max 2
Management’s responsibility (e.g. safe custody) 1
Maintaining (who, frequency) max 2
Checking (existence, completeness) max 2
–––
max 5
–––
(c) Disposals
Work on schedule 1
Detail as part of existence testing max 2
After-date sale 1
–––
max 3
–––

Total marks 20
–––

17
 Marks available Marks awarded
18 POEHLER CO

(a) Substantive procedures to verify the completeness

and accuracy, valuation and allocation assertions

Allowance for irrecoverable debts

Generally 1 mark per procedure up to a max of 4

Trade payables
Generally 1 mark per procedure up to a max of 4

Accruals
Generally 1 mark per procedure up to a max of 4

Provision
Generally 1 mark per procedure up to a max of 4
–––
16
–––

(b) Direct confirmation of accounts payable

(i) Why auditor may decide not to carry out
Generally up to 1 mark per point up to a max of 2

(ii) Two situations when appropriate

Generally 1 mark each example to a max of 2
–––
4
–––
Total marks 20
––

18
 MOCK EXAM FEEDBACK SUMMARY – PAPER F8 MOCK 1

Q Part Topic Study RQB Commentary

Text ref coverage

Section A: ALL questions to be answered

1– OTQ All OT case Very important to ensure ALL questions are attempted – even if a best guess. This could make the
15 Qs difference between pass and fail.

Section B: ALL questions to be answered

16 (a) Risk 8 17 – 23 Definitions are basic bookwork, but explaining the relevance to the nature, timing and extent of audit
work would have probably caused most candidates problems.

(b) A typical F8 question – part (a) definition followed by part (b) the practical application. A pass mark
would not be obtained without the practical application of the auditor’s response.

(c) Fraud 11 29 – 31 Bookwork should have got four of the available 11 marks, but again candidates who were unable to
analyse the scenario and give practical examples would not pass.

17 (a) Internal 12 32 – 39 Typical form of question on control systems, this time on the purchase of non-current assets. The
controls difficulty most candidates would have had with this question is the ability to describe a test of control
having made the control recommendation.

(b) Non-current 22 50, 51 Candidates would have struggled with this part of the question if they did not understand the purpose
assets and use of a non-current asset register.

(c) Fairly straight forward application of substantive procedures to verify the completeness of non-current
asset disposals. Those who used the disposal schedule as the basis for selecting their sample would
have scored few, if any, marks as this approach is for overstatement not completeness (understatement).

18 (a) Substantive 24, 27 57 – 62 Candidates who had worked through the asset and liability sections of the Study Text would have
procedures 64 – 66 earned good marks for this part of the question. Nothing that should have caused problems.

(b) Accounts 27 64 – 66 A big risk here for candidates under time pressure (as it is the last requirement). It is very easy to rush
payable in, misread the requirement and launch automatically into accounts receivable confirmations.

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