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ACCA PROGRESS TEST

Advanced Audit and

Assurance (INT UK)

September 2022 to June 2023

Time allowed 3 hours and 15 minutes

All THREE questions are compulsory and MUST be attempted

Do NOT open this paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

Kaplan Publishing/Kaplan Financial

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PROGRESS TEST QUESTIONS

ALL THREE QUESTIONS ARE COMPULSORY AND MUST BE

ATTEMPTED
1
You are a manager in the audit department of Craggy & Co, a firm of Chartered Certified
Accountants, and you have just been assigned to the audit of Ted Co, a new audit client of
your firm, with a financial year ended 31 May 20X5.

Ted Co is a newly listed company which designs, develops and publishes computer games
including many highly successful games which have won industry awards. The company has
grown rapidly in the last few years. Ted Co was formed ten years ago by Denver Doyle, a
graduate in multimedia computing.

The following exhibits, available below, provide information relevant to the question:
1 Partner s email an email which you have received from Dakota Hackett, the audit
engagement partner.
2 Meeting notes notes from planning meeting between Dakota Hackett and Brooklyn
Brennan, the finance director.
3 Financial information extracts of Ted Co s draft financial statements and results of
the preliminary analytical procedures performed by one of the audit seniors.
4 Ralph Co details of Ralph Co, a competitor of Ted Co.
This information should be used to answer the question requirement within your chosen
response option(s).

Required:
Respond to the instructions in the email from the audit engagement partner. (40 marks)
Note: The split of the mark allocation is shown in the partner s email (Exhibit 1).
Professional marks will be awarded for the demonstration of skill in communication,
analysis and evaluation, professional scepticism and judgement and commercial acumen
in your answer. (10 marks)
(Total: 50 marks)

Exhibit 1 Email from audit engagement partner

To: Audit manager

From: Dakota Hackett, Audit engagement partner
Subject: Ted Co audit planning
Date: 1 July 20X5
Hello
I have provided you with some information in the form of a number of exhibits which you
should use in planning the audit of Ted Co. I held a meeting yesterday with the company s
finance director, Brooklyn Brennan, and we discussed a number of issues which will impact
on the audit planning. Based on the analysis I have done on this industry, it is appropriate for
overall materiality to be based on the profitability of the company.

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I require you to prepare briefing notes for my use in which you:

(a) Discuss the matters specific to the planning of an initial audit engagement which
should be considered in developing the audit strategy. (5 marks)
(b) Using the information in Exhibits 1, 2 and 3, evaluate and prioritise the audit risks to
be considered in planning the audit of Ted Co. (21 marks)
(c) Design the principal audit procedures to be performed in respect of:
(i) The portfolio of short term investments, and
(ii) The earnings per share figure. (10 marks)
(d) Using the information in Exhibit 4, discuss the ethical and professional issues raised if
your firm performs the audit of both Ted Co and Ralph Co and recommend any actions
necessary. (4 marks)
Thank you.

Exhibit 2 Notes from meeting with Brooklyn Brennan

In the last two years the company invested $100 million in creating games designed to appeal
to a broad, global audience and sales are now made in over 60 countries. The software used
in the computer games is developed in this country, but the manufacture of the physical
product takes place overseas.
Computer games are largely sold through retail outlets, but approximately 25% of Ted Co s
revenue is generated through sales made on the company s website. In some countries Ted
Co s products are distributed under licences which give the licence holder the exclusive right
to sell the products in that country. The cost of each licence to the distributor depends on
the estimated sales in the country to which it relates, and licences last for an average of five
years. The income which Ted Co receives from the sale of a licence is deferred over the period
of the licence. At 31 May 20X5 the total amount of deferred income recognised in Ted Co s
statement of financial position is $18 million.
As part of a five year strategic plan, Ted Co obtained a stock market listing in December 20X4.
The listing and related share issue raised a significant amount of finance, and many shares
are held by institutional investors. Denver Doyle retains a 20% equity shareholding, and a
further 10% of the company s shares are held by Denver s family members.
Despite being listed, the company does not have an internal audit department, and there is
only one non executive director on the board. These issues are explained in the company s
annual report, as required by the applicable corporate governance code.
Recently, a small treasury management function was established to manage the company s
foreign currency transactions, which include forward exchange currency contracts. The
treasury management function also deals with short term investments. In January 20X5, cash
of $8 million was invested in a portfolio of equity shares held in listed companies, which is to
be held in the short term as a speculative investment. The shares are recognised as a financial
asset at cost of $8 million in the draft statement of financial position. The fair value of the
shares at 31 May 20X5 is $6 million.
As a listed company, Ted Co is required to disclose its earnings per share figure. Denver Doyle
would like this to be based on an adjusted earnings figure which does not include
depreciation or amortisation expenses.
The previous auditors of Ted Co, a small firm called Crilly & Co, resigned in September 20X4.
The audit opinion on the financial statements for the year ended 31 May 20X4 was
unmodified.

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PROGRESS TEST QUESTIONS

Exhibit 3 Extract of draft financial statements and results of preliminary analytical

procedures
Statement of profit or loss (extract)
Year to 31 May 20X5 Year to 31 May 20X4 % change
Draft Actual
$000 $000
Revenue 98,000 67,000 46.3% increase
Gross profit 65,000 40,000 62.5% increase
Operating profit 12,000 9,200 30.4% increase
Finance charge 4,000 3,800 5.3% increase
Profit before tax 8,000 5,400 48.1% increase
Earnings per share 89.6 cents per share
Note: Earnings per share has been calculated as follows:
$000
Profit before tax 8,000
Add: Depreciation 1,100
Amortisation 6,000

Adjusted profit before tax 15,100

Adjusted profit before tax 15,100,000

Number of equity shares at 31 May 20X5 16,850,000 = 89.6 cents per share
Statement of financial position (extract)
31 May 20X5 31 May 20X4
Draft Actual
$000 $000 % change
Non current assets:
Intangible assets development costs 58,000 35,000 65.7% increase
Total assets 134,000 105,000 27.6% increase

Exhibit 4 Ralph Co

Your firm recently acquired another accountancy firm and Ralph Co is one of their clients.
Ralph Co is a rapidly growing competitor of Ted Co. It is hoped that the audit of Ralph Co will
be transferred to your department to take advantage of your specialism in the computer
games industry.

END OF QUESTION

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2
It is 1 July 20X5. You are an audit manager in Logan & Co, a firm of Chartered Certified
Accountants. You are currently working on two existing clients.
Kendel Co and Karol Co are both manufacturing companies with a financial year ended
31 March 20X5. Both audits are in the completion phase and you are in the process of
reviewing the audit files.
The following exhibits, available below, provide information relevant to the question:
1 Kendel Co selected results of the subsequent events and final analytical procedures
which have been performed by the audit team.
2 Karol Co: audit completion matters provides details of matters which have been
brought to your attention by the audit supervisor.
3 Karol Co: going concern file note extract details of management s going concern
assessment.
This information should be used to answer the question requirements within the response
option provided.

Exhibit 1 Kendel Co
Kendel Co sells furniture and home furnishings through retail stores and mail order. The draft
financial statements for the year ended 31 March 20X5 show revenue of $72.4 million (20X4:
$68.9 million), profit before taxation of $7.3 million (20X4: $6.7 million) and total assets of
$18.6 million (20X4: $17.5 million).
The audit is nearly complete and you are performing the final review ahead of signing the
auditor s report. During your review you identify the following issues.
There is no signed written representation letter on the audit file. The audit senior in charge
of the audit has documented on file that as there are no specific matters to include in the
representation, it is not worth bothering the client to obtain one just to have on file.
Due to various difficulties encountered during the audit, work towards the end of the audit
had to be rushed to get it finished. The audit senior instructed the audit juniors to scale down
sample sizes that had been decided at the planning stage to save time on sections where the
prior year file showed no problems had arisen.

Exhibit 2 Karol Co audit completion matters

Karol Co sells sports equipment. The draft financial statements for the year ended 31 March
20X5 show revenue of $21.1 million (20X4: $20.9 million), profit before taxation of
$0.9 million (20X4: $1.1 million) and total assets of $15.4 million (20X4: $11.7 million).
The audit supervisor has brought the following matters to your attention.
Revaluation of properties
Karol Co s management team decided to revalue properties for the year ended 31 March
20X5 that had previously been measured at depreciated cost. At the year end, three
properties had been revalued resulting in a revaluation surplus of $1 million. Another nine
properties have since been revalued by $2.7 million. The remaining three properties are
expected to be revalued later in 20X5.

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PROGRESS TEST QUESTIONS

Warranty provision
On 1 April 20X4 Karol Co introduced a free 10 year warranty on sales of its entire range of
golf equipment to cover the cost of repairs or replacement if defects occur. Sales of golf
equipment for the year ended 31 March 20X5 totalled $9.1 million.
The notes to the financial statements disclose the following:
Since 1 April 20X4, the company s range of golf equipment is guaranteed to be free from
defects in materials and workmanship under normal use within a 10 year guarantee period.
A warranty provision has not been recognised as the amount of the obligation cannot be
measured with sufficient reliability.

Exhibit 3 Karol Co going concern file note

The going concern section of the file includes a note stating:

Karol Co has prepared forecasts covering the period to 30 September 20X5. The directors
are currently developing a new strategy for the company that will be launched in September
20X5 and will include forecasts and projections for 1 October 20X5 to 30 September 20X9.
Until the strategy is finalised, the directors do not want to prepare forecasts beyond
30 September 20X5.

Required:
(a) Using the information in Exhibit 1, explain the quality management and other
professional issues raised by the audit senior s comments, discussing any
implications for the completion of the audit. (6 marks)
(b) Using the information in Exhibit 2, explain the matters which should be discussed
with management in relation to each of the issues, including an assessment of their
impact on the financial statements and on the auditor s report on the financial
statements of Karol Co for the year ended 31 March 20X5. (10 marks)

(c) Using the information in Exhibit 3, explain the implications for the auditor s report if
the directors refuse to prepare forecasts beyond 30 September 20X5. (4 marks)
Professional marks will be awarded for the demonstration of skill in analysis and evaluation
and professional scepticism and judgement in your answer. (5 marks)
(Total: 25 marks)

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