ACCA

Paper F8 (INT & UK)

Audit and Assurance
Revision Mock Examination
December 2010
Question Paper

ALL questions are compulsory and MUST be attempted

Time Allowed 15 minutes Reading and planning

3 hours Writing

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ALL FIVE questions are compulsory and MUST be attempted

1 You are the auditor of Fitta Ltd, whose principal activity is fitting out shops,
hotels and restaurants. The company employs 180 weekly paid employees,
and all employees are paid weekly directly into their bank accounts.
Hours worked are recorded on timesheets, which are completed by the
relevant employee and submitted straight to Lynn, the payroll clerk.
Lynn accesses the payroll system using a password. She enters the hours
worked, split between basic and overtime, into a PC and the program
calculated the gross and net pay.
A print out of the payroll is generated detailing for each employee, hours paid,
gross pay and taxes.
Lynn then takes the payroll to Mr. Mountain, the managing director who signs
the print out and gives authorisation to Lynn to transfer the details via BACS
to the company’s bank.
On completion of the payroll processing, Lynn copies the payroll details onto a
disc, which is kept in her desk drawer.
Details of starters and leavers are notified to Lynn by a phone call from the
workshop supervisors. Lynn writes down the details and updates the system
for the changes.
Each month Lynn posts the weekly summaries to the nominal ledger
accounts. Every month, the finance director reviews the monthly figures for
employer payroll taxes and prepares a cheque for the appropriate amount.

Required:
(a) Describe FIVE weaknesses in Fitta’s payroll system and for each
weakness, explain the consequence and recommend a control to
mitigate the weakness. (15 marks)
(b) Explain the reasons why an internal control system can never
give complete assurance that fraud cannot occur. (5 marks)
(c) Describe three substantive analytical procedures that might be
useful as audit evidence for employee costs comprising wages,
salaries and employers tax. (3 marks)
(d) During this year’s audit of Fitta, you are considering making use
of audit software. Explain how audit software could assist you in
the audit payroll costs. (3 marks)
(e) Describe TWO benefits and TWO disadvantages of using audit
software during the audit of Fitta Ltd. (4 marks)
(30 marks)

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2 (a) Explain why is it necessary for a client to sign a letter of
engagement. (2 marks)
(b) Detection risk for an audit is judged to be high. What does this
mean and provide three examples of factors that may increase
detection risk. (4 marks)
(c) State FOUR factors which should be considered by the external
auditors before placing reliance on the work of an external
expert. (4 marks)

(10 marks)

3 The board of directors of Stanley plc, a listed company which operates a

number of retail stores, has decided to introduce an internal audit function.
As a first step, the board wishes to buy in the service and has invited your
firm to tender for the contract. The role will include a range of activities
including:
● Review of accounting, internal control and risk management systems
● Examination of financial and operating information
Your firm has acted for this client for many years and provides a number of
services, including the statutory audit of the financial statements and ongoing
consultancy work.

Required:
(a) Explain the importance of independence to external auditing.
(5 marks)
(b) Identify and explain the threats to independence which arise
from the provision by your firm of all of the services outlined
above to Stanley plc, and suggest how they may be resolved.
(12 marks)
(c) In addition to the roles described above, suggest three other
activities that an internal audit department may perform for a
company. (3 marks)
(20 marks)

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4 You are planning the audit of Timb UK Ltd for the year ended 30 December
2010. The company is engaged in the manufacture, distribution and retailing
of timber imported from Europe and America. In recent years, the company
has moved beyond its traditional core business of importing and distributing
timber into the manufacturing of fencing and quality garden furniture, which
is sold with a 10 year guarantee. The majority of sales are to UK customers,
but the company has a small export market which has grown steadily over the
last few years.
At your planning meeting with the finance director the following matters were
identified as significant.

Operating activities
During the year, the company’s revenue increased by 20% and the gross and
operating margins increased by 5% and 2% respectively. Inventories and
trade receivable balances are significantly higher than in the previous year as
a result of the increased level of activity.
Ordering online on the company’s website commenced in March 2010.
Internet orders have grown progressively and the company has received over
12,000 orders, which represent 3% of company sales. The company is
continuing to incur costs in enhancing the website in order to make it faster
and easier to use.

Payroll
Payroll processing had been outsourced for a number of years but was
brought back in house as of 1 May 2010. Management was not satisfied with
the performance of the previous service provider and cancelled the contract.
The service provider had been responsible for making payments to the
employees and the monthly remittances to the tax authorities. The company
has recruited additional staff members to process the payroll.

Managing director’s intention to retire

The managing director has announced his intention to sell his 100% holding of
shares in Timb in order to concentrate on his other business interests.
Negotiations are underway with a potential buyer for his shares in Timb Ltd
and he would like the audited financial statements to be available by 28
February 2011.

Required:
(a) Identify and explain the key audit risks from the circumstances
described above. (10 marks)
(b) For each risk, outline briefly the audit work that you would
perform in that area. (10 marks)
(20 marks)

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5 Described below are situations which have arisen in three audit clients of your
firm. The year-end in each case is 30 November 2010.

Betta Networks plc

Betta Networks plc is a company in the telecoms sector which builds and
operates national fibre optic networks. During the year, the company
incurred costs of $8.5m in respect of repairs and maintenance to its networks.
These costs have been capitalized and included in non-current asset. The
directors refuse to make any adjustment in respect of this matter.
The pre-tax profit of Betta Networks plc for the year ended 30 November
2010 is $7.2m.

Rayton Limited
Inventories at the end of the year include $240,000 in respect of the cost of
items which had been returned by a customer because they were not in
accordance with the customer’s specification. The directors insist on including
the items at cost, as the company has an agreement to sell them to another
customer for $320,000, but only after modification of the items has been
carried out. The modification will cost an additional $140,000.
The pre-tax profit of Rayton Ltd for the year ended 30 November 2010 is
$2.4m.

Viva Limited
In September 2010, Mary Benton was paid $60,000 for services in respect of
interior design work at Viva Ltd’s head office. Mary Benton is the wife of the
managing director and majority shareholder of Viva Ltd. The managing
director refuses to disclose details of the transaction in the notes to the
accounts because of its sensitive nature.
The pre-tax profit of Viva Ltd for the year ended 30 November 2010 is
$10.4m.

Required:
(a) Explain the term ‘materiality’ and discuss its role in the conduct
of an audit. Explain why materiality can be a difficult area for
the auditors. (8 marks)
(b) In respect of the situations outlined above, reach a conclusion on
whether or not you would modify each audit report. Give
reasons for your conclusions and describe the potential effects, if
any, on each audit report. (12 marks)
(20 marks

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