ACCA Audit and Assurance (AA)

Achievement Ladder
Step 8 Questions

Questions

Time allowed: 3 hours

ALL questions are compulsory and MUST be attempted

SEP21/DEC21/MAR22/JUN22 EDITION
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HB2021

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Section A
The following information relates to questions 1 to 5.
You are an audit manager of Smith & Co. You have recently been assigned the audit of a new client,
Jones Co, a shoe manufacturing company which supplies shoes to well-known, luxury department
stores where shoes are sold for prices in excess of $500. The previous auditor of Jones Co, Atkinson
& Co, did not seek reappointment.
During a meeting with the Finance Director of Jones Co, he makes it clear to you that as well as
undertaking the external audit of the financial statements of Jones Co, the Board of Directors is
expecting the audit engagement partner to attend monthly board meetings in an advisory capacity,
much like a non-executive director. This is to assist the company in aligning its corporate governance
with the principles of corporate governance best practice.
During the course of your discussion with the Finance Director, he mentions that he would welcome
input from the audit team regarding the calculation of the taxation figures in the financial statements,
as this has been a notoriously difficult area to account for in the past and is material to the financial
statements.
The Finance Director also tells you that in the past it has been something of a tradition to offer each
member of the audit team a pair of shoes of their choice once the audit has finished and the financial
statements have been issued.
At the close of your meeting, the Finance Director casually remarks that his niece has been accepted
by Smith & Co as a trainee ACCA accountant and that she commenced her training a few weeks ago,
which she is thoroughly enjoying so far.
Question 1
Question text
Which ONE of the following options best describes the threat which would arise if the audit
engagement partner attended the monthly board meetings and the appropriate action the
auditor should take?
Choose one:
Threat Appropriate action

I


Self-interest
Familiarity
Decline the offer as no appropriate safeguards possible
Accept the offer but do not make management decisions
 Self-review Have a second partner review of the audit files performed
 Intimidation Accept the offer and appoint another audit partner to be the key audit
partner for the audit of Jones

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 Question 2
Question text
In relation to the pair of shoes that are to be offered to each member of the audit team, which
ONE of the following actions should the auditor take?
Choose one:
 Accept the gift and inform those charged with governance at Jones Co
 Accept the gift as its value is trivial and inconsequential
 Inform those charged with governance at Jones Co and the ethical partner at Smith & Co before
deciding whether to accept the gift or not
 Politely decline the gift
Question 3
Question text
Which ONE of the following statements is TRUE regarding the issue of the audit team
assisting with the calculation of the taxation figures in the financial statements?
Choose one:
 The audit team should not assist with the calculation of the taxation figures in the financial
statements as the ACCA Code of Ethics and Conduct specifically prohibits the audit team from
preparing tax calculations for the purposes of the accounting entries in the financial statements.
 The audit team can assist with the calculation of the taxation figures in the financial statements
as long as the calculations are reviewed by the tax partner.
 The audit team's involvement in the calculation of the taxation figures results in a familiarity threat
for which no safeguards are appropriate.
 The audit team can assist with the calculation of the taxation figures as this is of a routine
mechanical nature and no safeguards are required.
Question 4
Question text
Which ONE of the following statements is TRUE regarding the Finance Director's niece
commencing her ACCA accountancy training with Smith & Co?
Choose one:
 As the Finance Director's niece is considered a close family member of the Finance Director, she
must not be allowed to be part of the audit team of Jones Co as she is in a position to exert
significant influence over the outcome of the audit.
 The Finance Director's niece should not be part of the audit team for the audit of Jones Co as the
familiarity threat arising is too great for any safeguards to mitigate to an acceptable level.
 The Finance Director's niece is unlikely to be able to influence the audit of Jones Co and so her
presence on the audit team is unlikely to cause any problems.
 Jones Co is a new audit client and as such the Finance Director's niece should be assigned to
the audit team of Jones Co in order to ensure that Smith & Co's relationship with Jones Co gets
off to the best possible start.

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Question 5
Question text
Which TWO of the following are normal principles of best practice corporate governance
guidance?
 All companies should be headed by an effective board, where it is the responsibility of the
executive directors to ensure the long-term success of the company.
 All directors should receive induction on joining the board and should regularly update and
refresh their skills and knowledge.
 The board should use the AGM to communicate with investors who hold more than a 5%
shareholding in the entity and to encourage their participation.
 There should be a formal, rigorous and transparent procedure for the appointment of new
directors to the board.
The following information relates to questions 6 to 10.
RT
You are an audit senior of Rowling & Co and are currently involved in the audit of the financial
31112 6

statements of Walsh Co for the year ended 31 December 20X6. Walsh Co is a manufacturing
company which provides components for electrical goods such as washing machines and
refrigerators.
You have been assigned the audit of trade receivables and revenue. These are material figures on
the financial statements and the interim audit visit highlighted that controls around sales and
receivables were poor. The audit procedures you have been undertaking are therefore wholly
substantive based. Due to the large number of transactions and balances involved, you have used
audit software to help you generate samples for testing.
You have completed the following audit testing:
(1) As part of your substantive testing on the revenue figure for the draft statement of profit or loss,
you performed an analytical procedure by comparing the draft revenue figure for the current year
on a month-by-month basis to the revenue figure on a month-by-month basis in the prior year
audited financial statements, and investigating any significant variance with the Finance Director
of Walsh Co.
(2) As part of the testing of the year-end receivables balance, you carried out a positive receivables'
confirmation, selecting all receivables over $20,000 to test. Of the 25 balances you selected for
the confirmation, five of them did not agree with the balances on the request and three of them
did not respond.
Question 6
Question text
In respect of the substantive testing you have performed on the revenue figures, which TWO
of the following financial statement assertions is this audit procedure providing evidence to
support?
 Cut-off
 Occurrence
 Completeness
 Presentation

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 Question 7
Question text
Which ONE of the following methods has been used to select the balances for the receivables'
confirmation?
Choose one:
 Random selection
 Monetary unit sampling
 Systematic selection
 Stratification with haphazard selection

Question 8
Question text
Which TWO of the following statements about receivables' confirmations are TRUE?
 A trade receivables' confirmation will provide the auditor with sufficient appropriate evidence
concerning the existence and valuation of receivables.
 Where an auditor receives satisfactory responses to the receivables' confirmation, it is still
necessary to perform other audit procedures on the receivables balance.
 If management refuse to allow auditors to undertake a receivables' confirmation, the auditor must
modify their auditor's opinion where the receivables balance is material.
 A trade receivables' confirmation provides evidence in relation to the rights and obligations of
receivables.
Question 9
Question text
In respect of the receivables' confirmation, one of the five customer balances which did not
agree was due to a balance of $12,000. This is currently being disputed by the customer who
believes Walsh Co invoiced goods at an incorrect unit price. Which ONE of the following
options represents the MOST appropriate action to take?
Choose one:
 Agree the disputed invoice to the goods despatch note to determine whether the goods were sent
out before the year end.
 Obtain a copy of the invoice and vouch whether the goods invoiced agree to the goods despatch
note in terms of quantity and product code.
 Discuss the need for an allowance in relation to this customer's balance with the credit control
department.
 Review credit notes issued to this customer during the post year-end period.

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Question 10
Question text
You have now completed your testing in respect of the receivables' confirmation and have
found several misstatements. Which TWO of the following statements correctly describes the
auditor's responsibilities in relation to misstatements?
 The auditor must keep a record of misstatements identified during the course of the audit unless
they are immaterial.
 As part of their finalisation procedures, the auditor shall consider whether the aggregate of
uncorrected misstatements in the financial statements is material.
 In deciding whether the uncorrected misstatements are material, the auditor shall consider the
size and nature of the misstatements.
 The auditor must consider misstatements relating to transactions and account balances, but not
misstatements relating to presentation.
The following information relates to questions 11 to 15.
You are an audit manager of Berry & Co and are in the finalisation stage of the audit of the financial
statements of two separate clients.
Wicks Co
Wicks Co has a year end of 31 December 20X6 and a draft profit before tax of $7 million. Wicks Co
runs a number of highly successful fine dining restaurants and was recently in the media spotlight for
winning a prestigious award for its food.
During your review of subsequent events, it has come to your attention that the company is facing a
claim for damages for potential lost earnings of $500,000 filed by a minor celebrity who visited the
restaurant in November 20X6 and tripped over a step on her way out of the restaurant after her visit.
The directors of Wicks Co are not intending to include a provision for the claim as they believe it will
come to nothing. However, after reviewing correspondence from Wicks Co's solicitor, you ascertain
that the legal advice is that Wicks Co should settle the claim out of court for a figure in the region of
$250,000 in order to avoid any negative publicity that might arise should the claim go to court.
Additionally, the Finance Director of Wicks Co has presented you with the draft annual report and,
during your review of this, you notice that one of the key performance ratios disclosed in the draft
annual report is not consistent with the ratio calculated using the figures in the financial statements.
Rhodes Co
Rhodes Co, a listed entity, has experienced trading difficulties recently, such as the loss of key
customers to a competitor, refusal of additional borrowing from its bank, and a pre-tax loss. The
directors of Rhodes Co are maintaining that the company is still a going concern. However, you have
evidence which suggests that the financial statements of Rhodes Co should be prepared on a break-
up basis.

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 Question 11
Question text
Which ONE of the following options describes how the auditor's report for Wicks Co would be
affected by the damages claim if the directors of Wicks Co do not agree to include a provision
of $250,000 in the financial statements to cover the likely amount of the claim?
Choose one:
 The auditor's opinion would be unmodified but the auditor's report would be modified by the
inclusion of an emphasis of matter paragraph, drawing users' attention to the matter.
 The auditor's report would be unmodified.
 The auditor's opinion would be modified with an 'except for' opinion and include details of the
claim in the basis for qualified opinion section of the auditor's report.
 The auditor's opinion would be unmodified but the auditor's report would be modified by the
inclusion of a section headed 'Material uncertainty related to going concern' as any negative
publicity generated by the claim may affect the ability of the company to continue operating.
Question 12
Question text
Which ONE of the following options best describes the impact of the inconsistency in the
annual report on the auditor's report for the financial statements of Wicks Co if it is not
corrected?
Choose one:
 The auditor's opinion will be qualified with an 'except for' opinion as the misstatement in the
annual report is material.
 The auditor's opinion will be unmodified as the inconsistency is in the annual report, but the
auditor's report will be modified by the inclusion of an 'other matter paragraph' which refers to the
matter.
 The auditor's opinion will be unmodified and the inconsistency will be highlighted in the 'Other
Information' section of the auditor's report.
 The auditor's opinion will be qualified with an 'except for' opinion as the misstatement in the
annual report is material and the inconsistency will be highlighted in the 'Other Information'
section of the auditor's report.

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Question 13
Question text
Which of the following options accurately completes the following sentence regarding the
impact of the situation on the auditor's report on the financial statements of Rhodes Co?
If the directors of Rhodes Co refuse to prepare the financial statements on a break-up basis, the
auditor's opinion will be ………………………………. on the basis of a…………………………….. .
Choose one:
First option Second option
 Adverse Material uncertainty related to going concern
 Adverse Misstatement that is both material and pervasive
 Disclaimer Lack of sufficient appropriate evidence that is both material
and pervasive
 Disclaimer Material uncertainty related to going concern

Question 14
Question text
Which
I TWO of the following should be included in the written representation requested from
the management of Rhodes Co?
 That management has fulfilled its responsibility for the preparation and presentation of the
financial statements.
 That all misstatements uncovered during the audit have been adjusted for in the financial
statements.
 That all deficiencies in internal control that management are aware of have been addressed and
corrected.
 That management believe they will secure alternative funding in order for the financial statements
to be prepared on the going concern basis.
Question 15
Question text
The audit senior working on Rhodes Co is also unclear as to the purpose and content of the
key audit matters section in the auditor's report. Which TWO of the following statements about
key audit matters are TRUE?
 The inclusion of a key audit matter in Rhodes Co's auditor's report gives rise to a modification of
the report and the opinion.
 Key audit matters are included in the auditor's report for all listed companies.
 If the auditor's report includes a 'material uncertainty related to going concern' paragraph, going
concern will not be reported as a key audit matter.
 If a modified auditor's opinion is issued on the financial statements of Rhodes Co, the auditor's
report must also include details of the matter giving rise to the modification as a key audit matter.

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Mock Exam AA: Hafizi Amin Bin Abd Rasid

Section B:

Q16- Electrical Co

a) i) To ensure that the composition of audit team is suitable before audit the client.
ii) To allocate enough time for the difficult task to senior members.
iii) To guide and brief junior members on the process of the audit

b)

Audit Risks Auditor’s response

1) Electrical Co offers a two year warranty on all Obtain the warranty claims documents from the
products sold and includes a static provision for past four years to confirm the trends of the claims.
warranties in the financial statements. Confirm that the static provision is in line with
trends.
Static provision indicates that Electrical Co have
not review their warranty provision. According to If the trends of claims is not in line with static
IAS37, provision need to be made when there is provision, discuss with the management regarding
reliable estimate and probable outflow that arises the necessity of adjusting the warrant provision.
from the past event. Failure to comply with this
standard, warranty provision will be understated
and profit will be overstated.
2) Electrical Co has incurred costs of $860,000 to Obtain the breakdown of new manufacturing
acquire the new manufacturing facility; this facility, cast the amount and confirm the insurance
amount includes the site acquisition cost and all plan was not capitalized.
legal fees as well as a three year insurance plan
taken out in relation to the building. If the insurance plans is capitalized, discuss with
the management regarding why insurance plans
The insurance plans taken is not a directly were considered directly attributable cost.
attributable cost to the asset. According to IAS 16,
only purchase price and directly attributable cost
can be capitalized as cost of the asset. Failure to
comply with this standard, will cause the asset and
depreciation is overstated.
3) The purchase of the new manufacturing facility Review the financial statement and confirm that
was financed by a bank loan of $750,000 and was bank loan has been properly accounted as non
completed on 1 September 20X6. current liability.

Bank loan is a long term loan. There may be Inspect the journal entries of the bank loan,
possibility that the management misallocated this confirm it is accounted as Dr Bank Cr Loan( Non
bank loan as short term loan. Thus, this will cause current liability).
the non current liability is understated and current
liability is overstated
4) Electrical Co as they are also in the Inspect the breakdown of sales and confirm that
process of tendering for a contract to supply goods the tendering contract is not included in the
to one of the leading high street retailers. breakdown.
Electrical Co is confident of winning the contract
If the tendering contract is included, discuss with
According to IFRS 15, revenue can only be the management regarding the performance
recognize when the goods have been delivered to obligation criteria that have to be satisfied by the
the customer. There may be possibility that customer.
Electrical co has recognize the tendering contract
as revenue thus this will cause the revenue and
profit is overstated.
5) additional $100,000 on its bank loan and has Inspect the correspondence with the customer
increased production so it has sufficient inventory and confirm the terms and conditions that they
available should it win the contract. have agreed with the client.

There may be possibility that the contract will not

be win by the Electrical Co. Since the bank loan has
been obtained to increase inventory may get
unsold, this will affect the going concern of
Electrical Co
6) During the year, Electrical Co has continued to
grow, albeit more quickly than in previous years.

Since there is continuos grow, there may be

possibilities that inventories values fall below Net
realizable value. This is not in line with IAS2. Thus,
this will cause inventories is overstated.
7) A separate inventory count will be conducted at
each manufacturing facility and it is possible that
inventory will be transferred between the two
facilities on the day of the inventory count.

c)

Test Of Control Control Objective

1) From a sample of member that is entitled to The sales targets for each member of management
bonus, recalculate the bonus by taking audited are embedded within the computerised wages
bonus percentage multiply by targeted sales. system and each bonus must be recalculated and
authorised prior to being paid. Sales targets are
felt to be reasonably ambitious

Recalculation of the bonus is to ensure the

mathemathical accuracy and confirm that that
computerized wages system is reliable
2) Inspect a sample of overtime sheet, look for the All overtime is authorised and signed off prior to it
signature of manufacturing facility manager. being carried out, by the completion of an
Confirm that signature it is authentic. overtime schedule by the manufacturing facility
manager.
 The signature of the manufacturing facility
manager is necessary as a proof that authorization
and review has been made before the payment.
3) Take a sample clock card, reperform the clock in Manufacturing staff are required to clock in and
and clock out action and confirm the time stated in clock out at the beginning and end of each shift.
clock card is correct.
By reperforming the clock in and out action,and
also checking the accuracy of time recorded, this
will confirm that the system implemented by the
management is working efficiently and reliable.
4) Review the system of that automatically The hours recorded as worked are automatically
forward to payroll department and look for the forwarded to the payroll department at the end of
existence of weekly update. each week.

This test of control to ensure that payroll

department really being updated weekly so that
they can process for the payment to the
employees in timely basis.
5) Inspect the jobscope of payroll department and Several new staff have been employed during the
HR department, ensure that there jobscope are year. Once employed, human resources allocate
not same. the employee a staff number and send an
authorised new joiner report form to the payroll
Enquire to the staff of payroll department and department which contains the employee's staff
confirm whether they need to do Hr job number, salary and bank details.

The test of control is to confirm that the payroll

department and HR department does do the same
job as this is an indicator of segregation of duties.

d) i) Inspect the employment contract of the directors and confirm the bonus percentage that they
actually entitled to confirm the existence.

ii) Obtain the breakdown of the total bonus, cast the amount and ensure it is mathemathically
accurate.

iii) Recalculate the director bonus by taking the audited bonus percentage and multiply audited sales
target to confirm its accurate.

Q17- Homestores

a)
To: Homestores Co
From: External Auditor’s
Date: 25 August 2022

Based on our findings, these are internal controls that have been implemented by the management
which we figured out to be significant control deficiencies. Together with the attachment, we provide
the control recommendation.

Control deficiencies Control recommendation

1) Homestores Co does not have an internal audit Homestores should establish IA department for
(IA) department. the upcoming year. Ensure that the members of
the department hold relevant qualification to
Since there is no IA department, this may indicate undertake the jobs.
that the evaluation of operational business
activities is not done in timely basis and may cause
the misstatement in the purchasing system go
undetected.
2) The purchase ledger clerk maintains a list of Reviewal need to be made by senior clerk before
approved suppliers, but likes to use each supplier finalizing the order. Checking the amount of items
on a rotational basis, so they place the order with and match it with the requisition form to ensure
the next supplier on the list after the one they its accuracy.
used for the previous order.

There is no reviewal process before the order is

finalized by the purchase clerk. If reviewal process
is not made, there may be possibilities that
purchase clerk may excessively order the inventory
which may cause the company need to bear
unnecessary cost.
3) The monetary value of orders can vary For order that below $1000, special forms need to
considerably between $1,000 and $50,000. be filled and approved by the purchase director.
Signature need to be obtained as a proof of
The orders cannot be made if the items price is authorisation of order.
below $1000. The items may be important and
need to be used in short amount of time. This will
cause the company inefficiency to manufacture
the items in timely basis.
4) If the supplier does not send a GDN no internal Warehouse staff should raise internal GDN every
goods received note is raised. time the items received does not have supplier
GDN. The internal GDN should be sequentially
This will lead to understatement purchases since numbered.
there is no internal GDN to be recorded in the
accounting record. Thus, Homestores purchases
record will contain error.
5) Upon receipt of the purchase invoice from the Purchase ledger clerk need to send another copy
supplier, the purchase ledger clerk matches the of GDN to account department every time the
invoice details back to the signed copy of the GDN orders received. Once sent, contact the account
received from the inventory manager. department staff to confirm that they received the
copy.
The accounting department does not receive a
copy of GDN. This will cause the purchase cannot
be recorded in timely basis and cause the
purchases to be understated.
6) The company's cash flow can often vary from Purchase clerk need to confirm the amount that
month to month and so the purchase ledger clerk they actually owed to supplier before payment is
makes a regular monthly payment to each made. Checking by the senior clerk need to be
supplier. This can mean that for some months the made before the payment take place.
company overpays the supplier whilst in other
months the full balance may not be paid.

If there are few months where the full balance not

paid to suppliers, these may cause dispute
between suppliers and Homestores thus will lead
to loss of supplier’s goodwill.

b)

Q18- Walton

a) sufficient and appropriate evidence is simply can be describe that those evidences are capable to
meet the assertions of the audit. The evidence does not necessarily to be many.

b) i) 1) Obtain the breakdown of warranty provision, cast the amount and confirm that it is
mathemathically accurate.
2) Compare the current year claims with the claims of the past two years and investigate for any
significance difference.
3) Hire an auditor’s expert( professional valuer) and confirm the reliability of new range computers,
then confirm with the management regarding the necessity provision that shall be allocated.
4) Inspect the financial statement and confirm that the provision has been recorded as accordance
with IAS37.
5) Obtain written representation from the management that they have disclosed everything
regarding the provision.

ii) 1) Obtain the breakdown of receivables ledger, cast the amount and agreed the total with the
amount reported in financial statement.
2) Compare the current year receivables and the prior year receivables and investigate for any
significance difference.
3) Inspect the sales invoice of Acton’s unreceived good and match it with the respective goods
delivery note to ensure that the items has been sent.
 4) Inspect the sales invoice that deemed to be paid by barton, match it with the receipt issued and
confirm the amount has been credit to client’s bank to ensure payment is really occurred.
5) Obtain external confirmation by contacting Syan Co, confirm the amount that they owed to
Walton.
6) Discuss with the management regarding why the allowance for Syan is not made.
7) Obtain written representation from the management stating that they already disclosed
everything regarding receivables.

iii) The internal audit department can help Homestores by:

- providing internal controls that needs to be implement by Homestores, they also check the
control regularly to ensure it is properly carry out.
- Advising Homestores on which audit risk are they exposed so necessary adjustment can be
amended before the external auditors review.
- helping in liasing with external auditors as they will understand the audit jargons better than the
management.