AUDIT AND ASSURANCE (F8) REVISION QUESTION BANK

Answer 9 BONDI

(a) Arguments against acceptance of nomination

Rapid growth is often accompanied by inadequate accounting systems and weak

internal controls. However, rapid growth is not sufficient reason to decline an audit
although it increases inherent risk.

Rapid growth through aggressive takeovers implies a management philosophy that

is willing to accept risks and this is likely to apply to controls as well. Again this
increases inherent risk.

Failure to take action against employee fraud brought to the directors notice by the

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auditors is more serious. This fosters a visible culture of unethical behaviour that is
likely to permeate the company and to be shared by other employees. This will
result in a weak control environment.

Introduction of a new computer system must be undertaken very carefully. In

addition, an unnecessarily complicated system is one of the warning signs of fraud.

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Such a computer system may be difficult to audit.

Aggression against audit staff is a well-known device for concealment of top

management fraud. There are many documented examples of audit failure through
fear of the audit staff to query management explanations.

The impending public listing means that the company is under pressure to show an
improving performance but also means that the work of the auditor will come under
increasing scrutiny. There are always significant risks in accepting an audit under
such terms.
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Arguments for accepting nomination

As a larger firm your firm is likely to have the capability of influencing the directors of Bondi
and persuading them of the benefits of a more ethical style of business. This will benefit the
companys shareholders. If your firm rejects the audit they are likely to appoint a less
competent firm. This will not be in the shareholders interest and may discredit the
profession.
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(b) Matters relevant to obtaining knowledge for development of the audit plan

Employee frauds

More information is needed about the alleged employee frauds. In particular the
specific control weaknesses that were exploited and whether any changes have since
been made to the accounting and internal control systems.

The current positions held by the guilty employees and whether they have access to
assets and accounting records. Also, whether they are adequately supervised
especially if a lack of segregation of duties is apparent.

Computer system

Particular attention should be given to the control environment relating to computer

systems and to the evaluation of general (IT) and application controls.

The audit team should include sufficient computer audit specialists.

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 REVISION QUESTION BANK AUDIT AND ASSURANCE (F8)

Due to the complicated nature of the system, tests of controls could include the use
of test data or other computer assisted audit techniques.

Contracts with manufacturers

Examine the terms of contracts and the strategies adopted by the company for
securing maximum benefit from them.

An industry specialist may provide evidence regarding the problems encountered by

manufacturers and dealers in confirming compliance with these contracts.

As the incentive schemes may have accounting implications (e.g. discounts and 0%
finance) the commercial substance as well as the legal form of the transactions with

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the manufactures must be understood and the impact on the financial statements
assessed.

(c) Misstatement

As this appears to be a fraud against the government through falsification of

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accounting records, the evidence that the falsification of the records is deliberate
and not an accidental consequence of a poorly designed computer system, must be
documented.

The matter must be discussed with management. Management must be asked to:

correct the fictitious records;

make full provision for all taxes including any penalties for which they are
potentially liable; and
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make a full disclosure to the taxation authorities.

If management refuse, the audit opinion should be modified if the amount of taxes
not provided for is material (qualified except for opinion).

The auditors duty of confidentiality prevents the auditor from raising the matter
with the taxation authorities. Therefore, it may be most appropriate to resign from
the audit if management refuses to put a stop to the malpractice. Any written
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statement of circumstances required on ceasing to hold office could allude to the

matter but would need to be carefully worded, probably with legal advice, to avoid
accusing the directors of fraud and exposing the firm to a charge of defamation (i.e.
causing damage to reputation).

Answer 10 SPECS4YOU CO I

(a) The purposes of audit working papers

To assist with the planning and performance of the audit.

To assist in the supervision and review of audit work.

To record the audit evidence resulting from the audit work performed to support the
auditors opinion.

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 AUDIT AND ASSURANCE (F8) REVISION QUESTION BANK

(b) Documentation required Information obtained

Memorandum and articles of Details of the objectives of Specs4You, its permitted

association. capital structure and the internal constitution of the
company.

Most recent published financial Provide detail on the size of the company, profitability, etc
statements. as well as any unusual factors such as loans due for
repayment.

Most recent management Determine the current status of the company including on-
accounts/budgets/ cash flow going profitability, ability to meet budget, etc as well as
information. identifying any potential going concern problems.

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Organisation chart of Spec4You. To identify the key managers and employees in the
company and other people to contact during the audit.

Industry data on spectacle sales. To find out how Specs4You is performing compared to
the industry standards. This will help to highlight any

entities.
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Financial statements of similar

Prior year audit file.

areas of concern for example, higher than expected cost of
sales, for investigation on the audit.

To compare the accounting policies of Specs4You and

obtain additional information on industry standards.

To establish what problems were encountered in last

years audit, how those problems were resolved and
identify any areas of concern for this years audit.

Internet news sites. To find out whether the company has any significant news
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stories, (good or bad) which may affect the audit
approach.

Answer 11 SPECS4YOU CO II

Working paper standards

The audit working paper does not meet the standards normally expected in a working paper because:
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The page reference is unclear making it very difficult to either file the working paper in the
audit file or locate the working paper should there be queries on it.

It is not clear what the client year end date is the year is missing. The working paper could
easily be filed in the wrong years audit file.

There is no signature of the person who prepared the working paper. This means it is unclear
who to address queries to regarding the preparation or contents of the working paper.

There is evidence of a reviewers signature. However, given that the reviewer did not query
the lack of preparers signature or other omissions noted below, the effectiveness of the
review must be put in question.

The test objective is vague it is not clear what correct means for example, it would be
better to state the objective in terms of assertions such as completeness or accuracy.

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 REVISION QUESTION BANK AUDIT AND ASSURANCE (F8)

The test objective is also stated as an audit assertion. This is not the case as no audit
assertions are actually listed here.

It is not clear how the number for testing was determined. This means it will be very difficult
to determine whether sufficient audit evidence was obtained for this test.

Stating that details of testing can be found on another working paper is insufficient time will
be wasted finding the working paper, if it has, in fact, been included in the audit working
paper file.

Information on the results of the test is unclear the working paper should clearly state the
results of the test without bias. The preparer appears to have used personal judgement which
is not appropriate as the opinion should be based on the facts available, not speculation.

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The conclusion provided does not appear to be consistent with the results of the test. Five
errors were found therefore it is likely that there are some systems weaknesses.

Answer 12 BRIDGFORD PRODUCTS

(a) Importance of planning

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ISA 300 Planning an Audit of Financial Statements requires that The auditor should plan the
audit work so that the audit will be performed in an effective manner. It goes on to say that
planning means developing a general strategy and a detailed approach for the expected
nature, timing and extent of the audit.

Planning will address the appropriate approach to the components of the company,
preliminary risk assessment and materiality assessment. It will include the timing of the audit
work. It will be necessary to agree a timetable with the company of when information will be
available. For example:
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the inventory count;
when the full financial statements are available for audit;
when the financial statements are agreed and signed by the directors and the auditor.

The necessary level of skills (both internal and, if necessary, external) will be determined and
staff booked and external experts contracted.
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A budget will be prepared which sets the time which should be spent on each aspect of the
audit and the completion dates of each part of the audit.

During the audit, progress will be compared with the audit plan. Any adverse (and
favourable) variances against the plan will be investigated, and the plan amended if it is
considered appropriate.

The requirement to plan an audit ensures senior audit staff have considered the work which is
required to complete the audit, and the timing of that work so that it fits in with the dates
information is available from the company and the review and planned completion dates.

By having a plan, the auditor will take a more considered and efficient approach to the audit,
which will improve the quality of the audit, and thus both minimise the time spent on the
audit and the overall audit risk.

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