Paper F8 (INT)

ACCA REVISION
MOCK 1

Audit & Assurance

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ALL FIVE questions are compulsory and MUST be attempted

1.
The management of Murewa Inc, a retailer of domestic appliances, has requested that your firm
assist with a risk assessment exercise, as it is seeking assurance that there are adequate controls in
place to minimise exposure to the business risks to which its retailing operation is exposed.

The company operates a number of stores throughout its home country, and sells a wide variety of
products ranging from inexpensive appliances to high-value items such as television and video
equipment. The company has a policy of providing a higher level of personal service and advice to
its customers than available from its competitors, and aims to reflect this in the remuneration of its
employees. In addition, the company operates a policy of flexible opening hours, whereby store
managers have discretion to determine opening hours to suit local demand.

The till systems in each store are networked devices which also perform inventory control and
ordering functions, and have additional linked devices for validating cheque guarantee cards and
credit/debit cards in respect of non-cash transactions.
The product lines are competitively priced, and it is company policy to keep a full range of products
so that it can provide any of its products within twenty four hours.
Once inventory has reached its re-order level, a purchase order is automatically generated and
transmitted to the approved supplier. Suppliers deliver the goods to the company’s central
warehouse for distribution to the stores by the company’s own fleet of vehicles.

The company uses a mixture of leasing and outright purchase to fund its non-current assets. Its
premises are all leased, but all other non-current assets are purchased. It replaces 20% of its
vehicles every year.

Required:
a. Identify the business risks in respect of the retailing operations of Murewa Inc and, for
each risk, recommend a control procedure that could be implemented to mitigate the risk.
(16 marks)
b. Audit reports
You are an audit manager and you are considering the form and wording of the audit
opinion for three different clients. The following relevant points have been brought to your
attention.
1) Aluja Ltd is being sued by a customer for damages. The amount being sought by the
customer is substantial and could cause Aluja financial difficulties if they are found
culpable. Legal opinion is divided as to the likely outcome of the case. In response the
directors have disclosed the matter in a note to the financial statements.
(4 marks)
2) Marange Ltd suffered a flood at the head office shortly after the yearend. Whilst no major
assets suffered significant damage a substantial part of their accounting records, most of
which were the only copies, were destroyed. (3 marks)
3) Save Ltd has included a provision of $100,000 for doubtful debts in the year-end accounts.
Evidence gathered during the course of the audit led the team to conclude that the provision
is understated by $200,000, an amount that is considered material to the financial
statements. (3 marks)

Required:

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 Discuss the impact of the above matters on the form and wording of the audit report,
assuming in each case that the matters cannot be successfully resolved and the financial
statements are not amended. (10 marks)
NB: the individual mark allocations for each scenario are shown above.

c. Contrast the nature of the assurance offered in a review engagement in comparison to an

2.
a. ISA 500 Audit Evidence states that 'the objective of the auditor is to design and
perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate
audit evidence to be able to draw reasonable conclusions on which to base an audit opinion.’

Required:
Discuss what is meant by ‘sufficient appropriate’ audit evidence. (5 marks)

b. ISA 240 the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
describes the responsibilities of both management and the auditor with regard to preventing and
detecting fraud.
Required:
List and explain the responsibilities of both management and auditors with regard to the prevention
and detection of fraud. (5 marks)
(Total: 10 marks)

3. The directors of Maduve, a newly-formed company, have written to you with a view to securing your
services as auditor. Within their letter, you note the following comments: 'Your duties and rights as auditor
will be determined by the board of our company. In the main, these duties are in line with the usual legal
requirements, but in the event of conflict or exclusion we will indemnify you against any legal action
brought as a consequence of the position adopted. The board also retains the right to dismiss you at any
time without necessarily disclosing the reasons for their action.

Required:
a. List and explain the duties of an auditor. (6 marks)
b. Discuss the relationship between auditors and company directors. (2 marks)
c. State the legal rights of an auditor of a limited company. (4 marks)
d. Discuss whether directors have the authority to dismiss auditors. (2 marks)
e. Explain the steps you would take prior to accepting the appointment as auditor to Maduve.
(6 marks)
(Total: 20 marks)

4. Gushungo is a small company that manufactures and sells high quality knitwear. Its customers are mainly
fashion boutiques.

Gushungo has two directors, one of whom is an executive, involved in the day-to-day administration of the
business. The other is non-executive. The accounts staff include Mr Robert, who is responsible for
processing revenue and receivables, and Mrs Grace, who is the purchases and wages clerk.

The company has one sales representative, who visits shops throughout the region. He is responsible for
finding new clients and for generating orders from all customers. Orders are recorded on a pre-numbered

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 two-part order form. He passes the completed forms to the accounts department. Mr Robert files one copy
of the order form in numerical sequence and passes the other to the warehouse. The completed order is
despatched from the warehouse by courier, accompanied by one copy of a despatch note. The other copy is
sent to Mr Robert, who prepares an invoice based on the information it contains and on the company’s price
list. He sends one copy of the invoice to the customer, and a second copy of the invoice is retained. Each
Friday, Mr Robert inputs the week’s invoices into the computerised revenue ledger. He then files the
invoices alphabetically by customer name. Despatch notes are not retained because filing space is limited.
Mr Robert opens the post daily and lists remittances received from receivables. Every Friday, he inputs the
information listed to the receivables ledger. Cheques received are banked daily by the executive director.
Mr Robert reviews the accounts receivables ledger balances every month and writes to customers who have
not paid within 90 days of receiving goods. The receivables ledger is printed out annually for year-end
purposes. Otherwise no hard copy is printed and Mr Robert reviews the receivables ledger on the computer
screen. The company’s computer package includes the facility to produce a day book and accounts
receivables ledger control account. These are not used because Mr Robert considers that the low volume of
transactions (10 to 15 invoices per week) makes them unnecessary.

Required:
a.
i. List the significant deficiencies in the sales and receivables system at Gushungo.
(5 marks)
ii. For each deficiency explain why it is a deficiency and state how it can be overcome.
(10 marks)

During the audit you also identify the following significant points:

i. Mrs Grace amends the payables’ master file with details of new suppliers, on the verbal
authority of the executive director. A printout of amendments is not obtained.
ii. Mrs Grace reconciles payables ledger balances on the face of supplier statements on a
monthly basis, but the statements are not retained once the accounts have been reconciled.
iii. At the month end Mrs Grace prints off an aged payables ledger and writes cheques to all
suppliers with amounts in the 60 days or older column. She then presents the cheques to the
executive director who signs them, before Mrs Grace mails them to suppliers.
iv. In 25% of the transactions examined, expense claims submitted by employees were not
supported by receipts, even though receipts are required by company policy.

Required:

b.
i. List the significant deficiencies in the purchases and wages control systems identified
during the audit of Gushungo. (5 marks)
ii. For each deficiency explain why it is a deficiency and state how it can be overcome.
(5 marks)
(Total: 25 marks)

5. Gaza Land Co sells motor vehicle fuel, accessories and spares to retail customers. The company owns 25
shops. The company has recently implemented a new computerised wages system. Employees work a
standard eight hour day. Hours are recorded using a magnetic card system; when each employee arrives for
work, they hold their card close to the card reader; the reader recognises the magnetic information on the
card identifying the employee as being ‘at work’. When the employee leaves work at the end of the day the
process is reversed showing that the employee has left work. Hours worked are calculated each week by the

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computer system using the magnetic card information. Overtime is calculated as any excess over the
standard hours worked. Any overtime over 10% of standard hours is sent on a computer generated report by
e-mail to the financial controller. If necessary, the FC overrides overtime payments if the hours worked are
incorrect. Statutory deductions and net pay are also computer calculated with payments being made directly
into the employee’s bank account. The only other manual check is that the FC authorises the net pay from
Gaza Land’s bank account, having reviewed the list of wages to be paid.

Required:
a. Using examples from Gaza Land Co, explain the benefits of using Computer- Assisted Audit
Techniques to help the auditor to obtain sufficient appropriate audit evidence.
(5 marks)
b. List SIX examples of audit procedures that may be performed on Gaza Land Co’s wages system
using audit software. (6 marks)
c. Explain how test data would be used to assist with the audit of Gaza Land Co’s wages system.
Discuss the limitations of this audit technique. (4 marks)
(Total: 15 marks)