Answers
Part 2 Examination – Paper 2.6(INT)
Audit and Internal Review (International Stream)
1 (a) Control objectives
Ordering of goods
– Goods are only supplied to authorised customers
– Orders are recorded correctly regarding price, quantity, item and customer details
Despatch and invoicing of goods
– Orders are despatched to the correct customer
– All despatches are correctly recorded
– Despatches only relate to goods ordered and paid for by customers
– Invoices raised relate to goods supplied by the company
(b) Audit tests on sales and despatch system
Audit test
Using test data if necessary, access ASG’s website
site and input order details for specific goods. Trace
those order details to the orders pending file.
For a sample of items in the orders pending file,
– agree to the orders awaiting despatch file,
ensuring that appliance details and quantities
are the same.
– agree sales details for that customer to the
monthly reimbursement from the credit card
company, checking amount received is the
product price less the appropriate commission
charged by the credit card company.
– agree the sales amount to the sales ledger file.
Review goods awaiting despatch file for old items
and inquire as to why those items are still on file.
For a sample of days, cast the sales day book file
and agree the total sales to the general ledger
accounts for that day.
For a sample of items in the goods awaiting
despatch file, agree to the despatch information held
on the despatch department computer.
For a sample of items on the despatch department
computer,
– agree back to the goods awaiting despatch file
ensuring details of product, quantity and
customer agree.
– agree to the inventory records confirming that
the correct appliance record was updated.
– check customer signature is on file agreeing
receipt of goods.
For a sample of items on the despatch department
computer, review to see that evidence of delivery to
customer is available. Investigate records where no
delivery information is available obtaining reasons
for this.
Review the despatch department computer files for
items not flagged ‘order complete’. Investigate and
obtain reasons for these items.
Note to candidates: The focus of the answer should be on substantive tests. Compliance tests are allowable where they relate
to the system described.
June 2006 Anwers
Reason for test
Ensure that order details are completely and
accurately recorded by the website software.
Ensure that details recorded agree to those input.
To ensure that details from the website software are
completely and accurately transferred to the orders
awaiting despatch file.
To confirm that amounts are received for each
appliance sold, and therefore that monies received
are complete and accurate.
To confirm that the amount of sales is not
understated or overstated in the ledger, general
ledger or financial statements.
To ensure that reasons for orders not being
processed are being obtained. A large number of old
items may also indicate problems with the credit
card authorisation systems which again will need to
be investigated.
To check the numerical accuracy of the day book
and the accuracy of posting to the general ledger file.
To confirm that order details are completely and
accurately transferred to the despatch department.
To ensure that the despatch information is accurate
and that the despatch record itself relates to a valid
sale.
Ensures that the inventory system correctly records
the appliance ordered and that the inventory system
remains accurate.
To confirm that evidence is available for receipt of
goods confirming that goods have been delivered.
To ensure that goods have been received and that
procedures for investigating non-despatch or receipt
are working.
To ensure that the despatch process is working
correctly and that incomplete items are being
investigated.
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2 (a) Audit work on railway trucks
– Examine board minutes authorising the purchase of the trucks (authorisation)
– Cast the non-current asset ledger; agree total of railway trucks to the general ledger and financial statements
(completeness)
– Ensure that railway trucks are actually stated as such in the non-current asset note. As a material item, separate
disclosure of this category is allowed (disclosure)
– Cast the non-current asset note in the financial statements. Ensure the note agrees to the amount disclosed in the
balance sheet (disclosure)
– For a sample of assets from the ledger, confirm existence by physically seeing the trucks (existence)
– Identify the supplier of railway trucks from a purchase invoice. Obtain all invoices from this supplier and confirm
completeness of recording in the non-current asset register (completeness). Also, during non-current asset inspection,
record details of some railway trucks and ensure those trucks are recorded in the non-current asset register
– Examine a sample of purchase invoices to confirm ownership of the trucks (rights and obligations)
– Review company policy for depreciation. As this is a new category of non-current asset, obtain representation letter point
regarding accuracy of amount. Confirm with amount charged in similar companies that the depreciation percentage
appears to be correct (valutation and allocation)
– Agree depreciation charged in the non-current asset note to the amount on the profit and loss account (valuation and
allocation)
– Check a sample of depreciation calculations to ensure that they are accurate and that they conform to company policy
(valuation and allocation)
– Ensure that any sales tax has been correctly treated e.g. capitalised where this is non-recoverable (valuation and
allocation)
– Current value may also be confirmed using a specialist or appropriate trade journal and compared to the net book value
shown in the non-current asset register (valuation and allocation).

(b) Issues to raise with management

Land and buildings
The depreciation rate has been correctly applied at 2% – given an estimated life for the land and buildings category of
50 years. However, the rate has been applied to the whole balance – that is land and buildings. In most companies, the
value of land is not thought to decrease and therefore depreciation is not appropriate.
To allocate depreciation accurately, a split is required between the land and buildings amounts in the financial statements.
Buildings will then be depreciated, but not the land.
Plant and machinery
Depreciation has been charged in full in the year of acquisition, but not charged at all in the year of disposal. This appears
to be an appropriate accounting policy – charging depreciation in the year of disposal would only amend the profit or loss on
sale in that year and so have a neutral effect on the financial statements..
There appears to be an error in the disposals calculation as the depreciation amount exceeds the cost being eliminated There
does not appear to be any logical reason for this situation and it should be discussed with the directors to identify the reason,
if any, for this treatment.
If an error is found, then the depreciation amount must be decreased (or cost eliminated increased) and the profit or loss on
sale amended accordingly.
Motor vehicles – point 1
The depreciation percentage stated in the financial statements is 33%. However, the calculation is either 25% on the year
end balance or about 21% on cost brought forward and additions for the year. To be consistent, the non-current asset
disclosure note must agree to the actual calculation in the non-current asset note.
The reason for the difference must be found and either the disclosure note or the depreciation calculation amended If there
has been a change in the depreciation rate, then this must also be disclosed in the financial statements. There has not been
a change in accounting policy – the policy of depreciation is unchanged, it is only the method of applying that policy that has
changed. There is no need to amend the prior year figures.
Motor vehicles – point 2
The cost and depreciation eliminated on sale are the same amount; this is not surprising given that the assets were fully
depreciated. However, the depreciation policy for motor vehicles is to depreciate the category over three years. If those vehicles
are now being kept for five years, then the depreciation rate may need revising to show the actual useful life of the vehicles.
The depreciation rate needs to be discussed with company management, and if necessary the rate amended to reflect the
actual life of the vehicles.

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 Memo
3 From: A Manager, Tela & Co
To: Jumper & Co
Subject: Corporate Governance in the SGCC Company
Date: 13 June 2006
As requested, I write to explain where your client SGCC does not appear to be following appropriate corporate governance codes
and to recommend changes to ensure that the principles of good corporate governance are being followed.
Chief Executive Officer (CEO) and Chairman
Mr Sheppard is both CEO and chairman of SGCC. Corporate governance indicates that the person responsible for running the
company (the CEO) and the person responsible for controlling the board (the chairman) should be different people. This is to ensure
that no one individual has unrestricted powers of decision.
I recommend that Mr Sheppard is either the CEO or the chairman and that a second individual is appointed to the other post to
ensure that Mr Sheppard does not have too much power in SGCC.
Composition of board
The current board ratio of executive to non-executive directors is 5:2. This means that the executive directors can dominate the
board proceedings. Corporate governance codes suggest that there should be a balance of executive and non-executive directors
so this cannot happen. A minimum of three non-executive directors are also normally recommended, although reports such as
Cadbury note this may be difficult to achieve.
I recommend that the number of executive and non-executive directors is equal to help ensure no one group dominates the board.
This will mean appointing more non-executive directors to SGCC.
Director appointment
At present, Mr Sheppard appoints directors to the board, giving him absolute authority over who is appointed. This makes the
appointment procedure and qualities directors are being appointed against difficult to determine. Corporate governance suggests
that appointment procedures should be transparent so that the suitability of directors for board positions can be clearly seen.
I recommend that an appointments committee is established comprising three non-executive directors to ensure there is no bias
in board appointments. Formal job descriptions should also be published making the appointment process more transparent.
Review of board performance
It is correct that the performance of senior managers is reviewed, but this principle should also be applied to the board. While
Mr Sheppard may undertake some review, this is not transparent and it is not clear what targets the board either met or did not
meet.
I recommend that performance targets are set for each director and actual performance assessed against these on a regular basis.
Reasons for underperformance should also be ascertained and where appropriate, changes made to the composition of the board.
Board pay
At present, board members’ pay is set by Mr Sheppard. This process breaches principles of good governance because the
remuneration structure is not transparent and Mr Sheppard sets his own pay. Mr Sheppard could easily be setting remuneration
levels based on his own judgements without any objective criteria.
I recommend that a remuneration committee is established comprising three non-executive directors. They will set remuneration
levels for the board, taking into account current salary levels and the performance of board members. Remuneration should also
be linked to performance, to encourage a high standard of work.
Internal control
The system of internal control in SGCC does not appear to be reviewed correctly. While external auditors will review the control
system, this review is based on their audit requirement and cannot be relied on to test the overall effectiveness of the system. The
system may therefore still contain weaknesses and errors.
I recommend that some more formal review of internal control is carried out, perhaps by establishing an internal audit department,
as noted below. The relationship with the company’s auditors must also be reviewed so that the work of the board and the auditors
regarding internal control is understood by both parties.
Internal audit
SGCC does not have an internal audit department. Given the lack of formal review of internal control in the company, this is
surprising. Good corporate governance implies that the control system is monitored and that an internal audit department is
established to carry out this task.
I recommend that an internal audit department is established, reporting initially to the audit committee who will monitor internal
control and then summarise reports for the board.
Financial statements
There appears to be acceptable disclosure in the financial statements regarding the past results of the company. However, the board
should also provide an indication of how the company will perform in the future, by a forecast review of operations or similar
statement. This is partly to enable investors to assess the value of their investment in the company.
I therefore recommend that the annual accounts of SGCC include some indication of the future operations of the company.

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 Audit committee
There is no mention in the report of an audit committee. Good corporate governance implies that there is some formal method of
monitoring external auditors as well as checking that the reports from the external auditors are given appropriate attention in the
company.
I recommend that an audit committee is established – made up from non-executive directors. The committee will receive reports
from the external and internal auditors (as mentioned above) and ensure that the board takes appropriate action on these reports.
I hope this information is useful. Please contact me again if you require any further assistance.
Sincerely
Ann C. Outent
Note to candidates: An alternative and allowable answer format was to answer sections (a), (b) and (c) of the question separately.
Taking this approach would also allow other valid points in part (b) such as inability to obtain a stock exchange listing.

4 (a) Confidential information

General rules
Information obtained during an audit is normally held to be confidential; that is it will not be disclosed to a third party.
However, client information may be disclosed where:
– Consent has been obtained from the client
– There is a public duty to disclose or
– There is a legal or professional right or duty to disclose.
However, these rules are general principles only; more detailed guidance is also available to accountants, as explained below.
ACCA’s Code of ethics – obligatory disclosure
As noted above, ACCA’s Code of ethics confirms that when a member agrees to work for a client in a professional capacity,
it is an implied term of that agreement that the member will not disclose a client’s affairs to any other person.
The recognised exceptions to this rule are where a member knows or suspects that his client has committed treason, or is
involved in drug trafficking or terrorist offences. In this situation, information must be disclosed to a competent authority. The
actual disclosure will depend on the laws of the jurisdiction where the auditor is located.
The auditor may also be obliged to provide information where a court demands disclosure. Refusal to provide information is
likely to be considered contempt of court with the auditor being liable for this offence.
ACCA Code of ethics – voluntary disclosure
A member may also disclose client confidential information voluntarily, that is without client permission, in a limited number
of situations.
– To protect a member’s interest e.g. to allow a member to sue a client for unpaid fees or defend an action for negligence.
– Where there is a public duty to disclose e.g. the client has committed an action against the public interest such as
unauthorised release of toxic chemicals.

(b) Independence risks

Audit partner – time in office
Mr Grace has been the audit partner of Ancients for eight years. His objectivity for the audit may be threatened by the ongoing
close relationship with the client. In other words, he may be too friendly with the directors of Ancients. This means he may
not be willing or able to take difficult decisions such as issuing a modified audit report for fear of prejudicing his friendship
with the directors. Rotating the audit partner would remove this threat.
Unpaid taxation fees
Ancients has not paid the taxation fees for work that took place nearly six months ago. The non-payment of fees can be a
threat to objectivity similar to that of an unpaid loan. In effect, McKay is providing Ancients with an interest free loan. The
audit partner in McKay may not wish to issue a modified report for fear that the client leaves and the ‘loan’ is not repaid. The
unpaid fee must be discussed with the directors in Ancients and reasons for non-payment obtained. McKay may wish to delay
starting the audit work for this year until the fee is paid to remove the potential independence problem. If the fee is not paid
at all then McKay may decline to carry out the audit.
Fee income
No details are provided regarding fee income obtained from Ancients. However, the company is growing rapidly and McKay
does provide other services besides audit. As a limited liability company, McKay should ensure that no more than 10% of its
recurring practice income (including auditing, accountancy and other work combined) is derived from this client. Obtaining
more than 10% could indicate undue financial reliance on one client, and impair objectivity regarding the audit report (again
fear of issuing a modified report and losing the fee income from the audit client). If the 10% limit is close, McKay may have
to limit other services provided so that independence is not impaired. An annual review will be required on clients where the
fee is between 5 and 10% to ensure that the fee income rules will not be breached.

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 Allyson Grace
Allyson Grace is not deemed to be connected to Mr Grace because she is presumably over the age of 18. If she was still a
minor, then there would be a connection and it would be inappropriate for Mr Grace to be the audit partner as he could in
theory influence Allyson’s decisions. However, there may still appear to be an independence problem as Mr Grace may not
be objective in making audit decisions. He may not wish to annoy his daughter by having to qualify the financial statements.
Appointing another audit partner would remove the perceived independence problem.
Meal
The offer of a meal by Allyson may appear to be a threat to independence; having received an expensive meal, the audit staff
may be favourably disposed towards Ancients and be less inclined to investigate potential errors. Audit staff are allowed to
receive modest benefits on commercial terms; whether there is a benefit depends on how expensive the meal is. To ensure
no independence issues it would appear that the invitation should be declined. One possible option would be for Mr Grace
and Allyson to pay personally as a purely social event even though this may be unlikely. However, this does not remove the
implied independence issue.

5 (a) Factors to consider when evaluating and testing the work of the internal auditor include:
– A check that the work is performed by persons having adequate technical training and proficiency as internal auditors,
by ensuring appropriate training programmes are in place and the auditor has appropriate qualifications.
– Ensuring that the work of assistants is properly supervised, reviewed and documented by reviewing the procedure
manuals of internal audit and the audit working papers produced.
– Determining that sufficient and appropriate audit evidence is obtained to afford a reasonable basis for the conclusions
reached, again by reviewing the internal auditor’s working papers.
– Checking that the conclusions reached are appropriate in the circumstances and that any reports prepared are consistent
with the results of the work performed by reviewing the work performed and the reports produced.
– Ensuring any exceptions or unusual matters disclosed by internal audit are properly resolved by the external auditor and
management.

(b) (i) Objectives of internal audit

Year end inventory count
The main aim of the year end inventory count is to ensure that the figure for inventory in the financial statements is
accurate. The objective of the internal audit department is to check the accuracy of the inventory count to ensure that
the physical goods inventory is correctly stated on the inventory sheets. This objective is achieved by checking the
control system over counting inventory. Internal audit work will involve ensuring that all inventory is counted, teams of
two people are counting inventory, and then performing test counts to determine the accuracy of the test counts.
Internal controls over procurement systems
The internal auditor will be ensuring that the procurement system is achieving its key objectives and operating according
to company guidelines. Specific aims will include:
– Ensuring purchases are authorised
– Quantity discounts are obtained
– Inventory received is recorded on goods received notes or similar.
Reviewing operations of the marketing department
The internal auditor will review the work of the marketing department with aims such as ensuring that the process is
being managed effectively and information is available to the marketing manager as required. Where deficiencies in the
information provided are noted, then an internal audit report will highlight those deficiencies and make
recommendations for improvement to the information systems. The objectives of internal audit in this case are more to
ensuring the efficiency of operations rather than any specific financial objective.
(ii) Objectives of the external auditor
Year end inventory count
The external auditor also needs to ensure that the figure for inventory is materially correct for the financial statements.
Part of the work of the external auditor is to attend the physical inventory count to ensure that the quantities and
condition of inventory is correctly recorded. Given that ZPM does not appear to have any perishable inventory, the main
objective will be to ensure correct recording of inventory quantity.
Internal controls over procurement systems
The external auditor will test the procurement system with the overall objective of determining that the purchases and
payables figures in the financial statements are correct. The objectives of testing will be to ensure that the control system
over procurement is operating efficiently, and ensure complete and accurate recording of purchases and payables
liabilities. If errors are found then this implies that the financial statements could also contain errors.

13
 Reviewing operations of the marketing department
As the operations of the marketing department do not normally impact on the financial statements, the external auditor
may not actually review this function.
(iii) Reliance by the external auditor
Year end inventory count
ZPM has 103 stores – which is likely to mean that the external auditor will not be able to attend the inventory count in
all stores, simply due to lack of staff. However, if inventory count procedures are the same at all stores, then reliance
can be placed on the internal auditor to attend some stores and check that the internal control systems are being
correctly applied in those stores. This reliance does not mean that the external auditor does not carry out any work; the
external auditor will compare results from stores tested with those of the internal auditor. Results should be about the
same; any differences in terms of errors found will be investigated, and reasons for those differences obtained.
Internal controls over procurement systems
The external auditor may rely on the work of the internal auditor regarding the procurement systems, where the work of
the internal auditor is relevant to the financial statements. Some areas such as ensuring quantity discounts are obtained
are less important than ensuring completeness of recording of liabilities. Again, the external auditor must perform some
work on the procurement systems; the presence of an internal auditor simply means that the work can be reduced.
Reviewing operations of the marketing department
Given that the external auditor does not need to review the operations of the marketing department then no formal
reliance is needed on the work of the internal auditor. However, internal audit reports may be reviewed to determine, for
example, the effectiveness of advertising spend etc to help determine the going concern situation of the company. In the
case of ZPM, the effectiveness of advertising new stores could be reviewed.

6 Flat SG1
Community Gardens
Long Road
Anytown
17 June 2006
Dear Jayne
I am pleased you are also thinking about accountancy as a career and understand your concern regarding the use of Auditing
Standards. I will try and explain the need for standards in this letter.
The working procedure of the IAASB to produce an ISA
The start of the process of producing an International Standard on Auditing (ISA) is for a subcommittee of the International Audit
and Assurance Standard Board (IAASB) to determine appropriate areas for an ISA, or to note where existing ISAs need amendment.
The subcommittee produces an exposure draft on that subject, initially for consideration by the IAASB. If the IAASB approve the
exposure draft, then it is circulated to the member bodies of the International Federation of Accountants (IFAC) and any other
organisations that have an interest in auditing standards and published on the IAASB website.
These bodies make comments on the exposure draft. Comments are sent back to the IAASB and the exposure draft is amended
as necessary. Finally the exposure draft is re-issued as an ISA or an International Auditing Practice Statement (IAPS).
The whole process can take between one and two years.
The overall authority of ISAs and how ISAs are applied in individual countries
ISAs are designed to be applied in the audit of financial statements and may be applied to the audit of other historical financial
information.
Each ISA contains the basic principles and procedures to apply to that ISA (identified by bold type in the ISA itself). Other text in
the ISA provides guidance on the implementation of the principles. In other words, to apply the ISA, the whole of the text, not
simply the parts in bold type, must be read and understood.
ISAs are not designed to override the requirements for the audit of entities in individual countries. So if our country did not require
an audit of specific entities, then the ISAs would not overrule that requirement.
Regarding the detailed requirements of an audit, such as the nature of testing or the issuing of an engagement letter, where our
country requirements meet those of the ISA, then the ISA will be used. It is therefore unlikely that our country would issue a
separate auditing standard; the ISA would be sufficient.

Where our local codes on audit differ from the ISA, then the local requirements are used. However, we are encouraged to introduce
changes in our country so that the requirements of the ISA are met. For example, our country may require an engagement letter
to be signed every five years, but the ISA requires one every year. In this case, local change is needed to comply with the ISA.

14
The extent to which an auditor must follow ISAs
An auditor should follow the ISAs wherever possible. However, in some situations an auditor may consider it necessary to depart
from the ISA so that the objectives of the audit can be achieved more efficiently. In this situation, the auditor can depart from the
ISA, but he or she must be prepared to justify the departure. It is expected that departure from any ISA will be the exception rather
than the rule.
The extent to which ISAs apply to small entities
To be clear, ISAs are meant to be applicable to the audit of any entity, no matter what its size. However, in small entities, the auditor
may have to amend the audit approach to fit the circumstances of that business. For example, there will be greater reliance on
substantive testing and management representations. However, the appropriate ISAs should be followed.
Conclusion
I hope that this clarifies your understanding of ISAs. Please let me know if I can be of further assistance to you in your accountancy
career.
Yours sincerely,
Rajit Grey

15
Part 2 Examination – Paper 2.6(INT) June 2006 Marking Scheme
Audit and Internal Review (International Stream)

Marks
1 (a) One mark for each valid control objective
Supply of goods – good credit card rating 1
Orders correctly recorded 1
Orders despatched to correct customer 1
Despatches correctly recorded 1
Despatches relate to orders 1
Invoices relate to goods supplied 1
Other similar correct points (each) 1
–––
Maximum marks 5
–––

(b) Key points 1 for each test and 0·5 for explanation of why the test is required
Input of order details 1·5
Orders pending to despatch file 1·5
Completeness of receivables – credit card company 1·5
Orders pending to receivables file – sales complete 1·5
Review orders pending file – old items 1·5
Cast receivables ledger – completeness 1·5
Goods awaiting despatch file to despatch department 1·5
Despatch department – agree back to orders awaiting despatch 1·5
Update of inventory records 1·5
Customer signature for receipt of goods 1·5
Incomplete information despatch department computer 1·5
Items not flagged ‘order complete’ despatch department computer 1·5
Other good relevant points (each) 1·5
–––
Maximum marks 15
–––

2 (a) One mark for each valid test

Board minute 1
Non-current asset ledger 1
Non-current asset note 1
See trucks 1
Completeness of recording 1
Purchase invoice 1
Depreciation policy OK? 1
Depreciation disclosure amount 1
Depreciation accurate calculation 1
Treatment of any sales tax 1
Confirm NBV using specialist or trade journal 1
Other relevant points (each) 1
–––
Maximum marks 10
–––

(b) Key points up to 2 marks for explaining the problem and 1 mark for stating the solution
Land and buildings – depreciation of land 3
Plant and machinery – depreciation eliminated > cost 3
Motor vehicles – depreciation calculated not = disclosure note 3
Motor vehicles – may be depreciating too quickly 3
Other relevant points 3
–––
Maximum marks 10
–––

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 Marks
3 1 mark for identifying the corporate governance problem, 1 for explaining why this is a problem and 1 for recommending a
solution
CEO and chairman 3
Composition of board 3
Director appointment 3
Review of board appointment 3
Board pay 3
Internal control 3
Internal audit 3
Financial statements 3
Audit committee 3
Other relevant points (each – but limit to 1·5 marks if not mentioned in the scenario) 1·5
Memo format/why writing 2
–––
Maximum marks 20
–––

4 (a) General rules

Statement don’t normally disclose without good reason 1
Simply stating rules
Client consent 1
Public duty to disclose 1
Legal or professional duty to disclose 1
ACCA Code of ethics – obligatory disclosure
Implied agreement not to disclose 1
Exemptions 1
Disclose to proper authority 1
Court demands disclosure 1
ACCA Code of ethics – voluntary disclosure (0·5 area 0·5 example)
Protect members interest 1
Public duty 1
Also allow other ethics where appropriate – e.g. person not considered fit and proper to carry out work. 1
Allow jurisdiction specific comments.
–––
Maximum marks 8
–––

(b) Mark allocation:

1 for identifying and explaining area
1 for explaining why an ethical issue
1 for the resolution of the problem
Gives potential for 3 marks per section.
Areas for discussion per the scenario
Audit partner – time in office
Unpaid taxation fees
Fee income
Allyson Grace
Meal
Rapid growth
Technical competence (cope with increased size of client)
Sufficient staff to allow rotation
–––
Maximum marks 12
–––

18
 Marks
5 (a) One mark for each valid point
Training and proficiency 1
Work supervised and reviewed 1
Evidence available to support opinion 1
Conclusions reached are appropriate 1
Unusual matters correctly resolved 1
–––
Maximum marks 5
–––

(b) Inventory count

(i) Check of control system over counting inventory 1
Examples of control system e.g counting in teams 1
Carrying out test counts. 1
Not relevant – carrying out counts by internal audit 0
(ii) Ensure inventory materially correct for FS 1
Attend inventory count to check control system/quantities 1
Note ZPM focus on quantities + reason 1
(iii) Rely on IA to test control systems – lack of staff and 103 stores 1
Does not mean not carry out any work 1
Review differences between IA and external auditor results 1
Procurement system
(i) Company policies followed 1
Example of policy – no specific ones required 1
(ii) Purchases and payables figures correct in FS 1
Control system for procurement working effectively 1
(iii) External auditor rely on IA where work relevant for FS audit 1
Work reduced only – still carry out some testing 1
Marketing
(i) Aims such as ensuring information available 1
(ii) External auditor not interested – not impact FS 1
(iii) No reliance needed 1
–––
Maximum marks 15
–––

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6 One mark for each valid point
(a) Due process to produce an ISA
Subcommittee – areas for ISAs 1
Exposure draft via IASSB and issued 1
Comments on exposure draft (ED) 1
Amendment of ED and issue of ISA 1
Other relevant points (each) 1
–––
Maximum marks 4
–––
(b) Authority of ISAs
Apply to audit of FS 1
May apply to other statements 1
Basic principles in bold type 1
Explanatory text in normal type 1
Must read all ISA to understand application 1
ISA not override requirements of national countries 1
Where relevant country use ISA and not issue own guidance 1
National requirements differ – use national 1
Adopt changes so that the ISA can be used 1
Other relevant points (each) 1
–––
Maximum marks 8
–––
(c) Extent to which auditor follow ISAs
Should follow wherever possible 1
Do not follow where audit more efficient 1
Must justify departure 1
Other relevant points (each) 1
–––
Maximum marks 4
–––
(d) ISAs apply to small entities
Applicable to any entity 1
Appropriate ISAs to be followed 1
Letter format/why writing 1
Other relevant points (each) 1
–––
Maximum marks 4
–––

20