AF304: AUDITING

I nt roduct i on and Assi gnment s

Semest er 1, 2014














School of Accounting and Finance
Faculty of Business and Economics
The University of the South Pacific


ii
Produced by the University of the South Pacific, Suva, Fiji, 2014.



First produced February 2014












Introduction & Assignments team for semester 1,2014
Course coordinator Dr Arvind Patel
Instructional designer Jane Kanas
Educational technologist Kerishma Seth
Electronic publisher Letila Fong
Cover design Marketing, Development and Communications Office
















This material has been prepared by the University of the South Pacific for use by students
enrolled in the course for which it was developed.

It may contain copyright material copied under the provisions of the Fiji Copyright Act 1999 or
under license from rights holders or their agents. Copyright in material prepared by USP is
owned by USP.

This material cannot be sold or copied for further distribution without the Universitys
permission. Where provided in electronic format, it can only be printed by or for the use of the
student enrolled in the course.





AF304 IA 12014




iii
Cont ent s
Calendar for semester 1, 2014 ...................................................................... iv
Your course coordinator ............................................................................... 5
Course introduction ...................................................................................... 6
Your learning materials ................................................................................ 7
Your learning support ................................................................................... 10
How to login to Moodle ............................................................................... 12
Study schedule .............................................................................................. 13
Assessment overview ................................................................................... 14
Grading Systems .......................................................................................... 15
Submission of assignments .......................................................................... 17
Plagiarism ..................................................................................................... 18
Assignment 1 ................................................................................................ 20
Past test paper ............................................................................................... 27
Past examination paper ................................................................................. 35



iv
Cal endar f or semest er 1, 2014

Beginning of semester 1
Laucala, Emalus and Alafua
campus students - Final day
for withdrawal with
remission of tuition fees for
semester 1 courses is 28
February 2014
Week 1 1721 February
Week 2 2428 February
Week 3 37 March

Other USP Campuses
students: Final day for
official withdrawal with
remission of tuition fees for
semester 1 courses* 28
March 2014
Week 4 1014 March
Week 5 1721 March
Week 6 2428 March
Week 7 31 March4 April
Mid-semester break 513 April

Final day for official
withdrawal without
remission of tuition fees for
semester 1 courses is 25
April 2014
Week 8 1418 April
Week 9 21 25 April
Week 10 28 April2 May
Week 11 59 May
Week 12 1216 May
Week 13 1923 May
Week 14 26 30 May
Study break Week 15 31 May8 June
Examinations Week 16 913 June
Examinations Week 17 1620 June

* If you are considering withdrawal from your course, contact your lecturer, local
USP Campus or Centre first to see if they can help.


Page 5 of 49

Your cour se coor di nat or
Your course coordinator will be a senior staff from the School of Accounting and
Finance. You will get to meet the coordinator during your first Satellite Tutorial.
During this tutorial you will be provided with the contact address of your
coordinator. You should also visit the Moodle site for further information. If you
have any questions, please post it on Moodle and someone will respond.
























If you have any questions or concerns, feel free to contact us on Moodle.

Page 6 of 49

Cour se i nt r oduct i on
This course is designed to introduce students to the general principles and
processes of the audit and assurance function in an ever-changing audit
environment. In this course the practice of auditing is explained in the context of
auditing theory, concepts, and current practice with appropriate reference to the
auditing standards. In addition, this auditing course considers the international
perspective of auditing and the effect on the globalization of the auditing
profession, with particular emphasis on the Pacific environment. The course will
study in detail the practical process of auditing in the context of statutory and
regulatory requirements and will emphasize on the development and practice of
financial statement audits, with an authoritative insight into the fundamental role
of auditors, the influence on audits, and related issues.
Lear ni ng out comes
On completion of this course, you should be able to:
1 Understand the assurance framework and appreciate the role of auditing
standards;
2 Critically evaluate issues currently facing the profession, including the
provision of expanded assurance and other services by the auditor to their
clients, the impact of new audit methodologies on auditor-client relationships,
and other issues concerning the independence of auditors;
3 Explain the nature and importance of professional ethics, independence,
corporate governance, fraud, related parties, and appropriateness of the going
concern basis;
4 Identify materiality and describe and explain the tests of controls;
5 Explain the purpose and steps involved in reviewing working papers and the
financial report, including the summarization and evaluation of audit results,
performance of analytical procedures in an overall review and the Auditors
reporting obligations;
6 Understand assurance services required by specific legislation or regulations,
including prospective financial information and reports on internal controls;
and
7 Understand other applications of the audit function, including compliance
auditing, performance auditing, comprehensive auditing, internal auditing,
forensic auditing and the audit function in the public sector environment.
All the above outcomes should be understood in the overall framework
of risk management



Page 7 of 49

Generic Attributes

In addition to learning outcomes, you should be able to acquire the following
generic skills upon completion of this course:

i. Cognitive Skills
a. Routine skills
computer skills , numerical skills, and report and essay writing
b. Analytic / design skills
initiate and conduct research, problem solving skills, construct
arguments, interpret data and reports, engage in ethical
reasoning.
c. Appreciative skills
evaluate and react to new ideas, think and act critically, make
judgments from ones own value framework, apply
disciplinary and multidisciplinary perspective and appreciate
processes of professional adaptation and behaviour.

ii. Behavioural skills
a. Personal skills
flexibility in different situations, act strategically, think and
act independently, focus on outcomes and think creatively.
b. Interpersonal skills
present, discuss and defend views, communication skills,
collaborate with colleges and work in teams.

Your l ear ni ng mat er i al s
You should have already received the following materials a week before semester
starts:
1. The Introduction and Assignments book, which you are reading now
2. Text Book *
3. Course Guide
4. A course Moodle page
Contact your USP Campus or Centre immediately if you are missing any of
the materials mentioned above.
The prescribed textbook for the course is:

*Leung, P., Coram, P., Cooper, B., Richardson, P., 2011, Modern Auditing &
Assurance Services, 5th Edition, John Wiley & Sons Limited, Australia.
You will need to purchase this separately in addition to those mentioned
above.


Page 8 of 49

Su! ement ar " mat er i a! s
Articles

You are encouraged to refer to journals to increase your understanding of
concepts and issues relating to the course. The following is a list of top
accounting journals which feature articles in the area of auditing:

Auditing: A Journal of Practice and Theory
Accountancy, CA Journal of New Zealand
Accounting and Finance
Accounting Review
Critical Perspectives on Accounting
Journal of Accounting Research
Accounting, Organization and Society
Journal of Accounting, Auditing and Finance
Review of Accounting Studies
The Australian CPA Journal Now called In The Black
Other professional journals held in the periodical section in the
Library.

This list is not exhaustive and students are encouraged to refer to other journals
which they believe are relevant. At the end of this course outline is a list of useful
articles on auditing that students may wish to refer to.

Library Sources

There is a copy of the prescribed text book on reserve in the main library in
Laucala Campus. You need to contact the Main Issue Desk of your respective
Library on Campus.

Internet Sources

The course will be administered through Moodle. Students can access the AF304
Moodle website by going to the following address:
www.elearn.usp.ac.fj

All announcements and resources will be posted on Moodle. You are also
encouraged to discuss issues or queries using Moodle forums.

Some useful articles: These will be posted on Moodle.
Abdel-khalik A. R., Why Do Private Companies Demand Auditing? A Case for
Organisational Loss of Control, Journal of Accounting, Auditing and Finance,
(Vol. 8, No. 1, Winter 1993), pp. 31-52.
Kinney Jr., W.R. 2005. Twenty-Five Years of Audit Deregulation and Re-
Regulation: What Does it Mean for 2005 and Beyond? Auditing: A Journal of
Practice & Theory (May Supplement): 89-110.

Page 9 of 49

Casterella, J.R.; J.R. Francis, B.L. Lewis, and P.L. Walker. 2004. Auditor Industry
Specialization, Client Bargaining Power, and Audit Pricing. Auditing: A Journal
of Practice & Theory (March): 123-140.
Benston, G.J., and A.L. Hartgraves. 2002. Enron: what happened and what we
can learn from it. Journal of Accounting and Public Policy (Summer): 105-127.
Krishnan, J., H. Sami, and Y. Zhang. 2005 Does the Provision of Nonaudit
Services Affect Investor Perceptions of Auditor Independence? Auditing: A
Journal of Practice & Theory (Nov): 111-135.
Carcello, J.V., D.R.Hermanson and Z. Ye, 2011. Corporate Governance Research
in Accounting and Auditing: Insights, Practice Implications, and Future Research
Directions, Auditing: A Journal of Practice & Theory, Vol. 30 No.3, pp.1-31
Carcello J. V., R. H. Hermanson, and N. T. McGrath, 1992. Audit Quality
Attributes: The Perceptions of Audit Partners, Preparers and Financial Statement
Users, Auditing: A Journal of Practice and Theory, (July), 1-15.
Fargher L. N., and Jiang L, 2008. Changes in Audit Environment and Auditors
Propensity to Issue Going-Concern Opinions, Auditing: A Journal of Practice &
Theory, (Vol. 27, No. 2, November), pp. 55 -78.



Page 10 of 49

Your l ear ni ng suppor t
#oca! t ut or i a! s
To assist you with your studies, regular face-to-face sessions may be held with a
tutor. You should check with your Campus or Centre at the start of semester to
see if face-to-face tutorials will be held for your course.
St ud" gr ous
Most people find it easier to study in a group or with a friend, at least for part of
the time. Working with others helps to motivate us. It provides a shared goal and
reduces feelings of isolation or boredom. Your local Campus or Centre will be
able to put you in touch with students doing this course and may help you get
organised.
#i $r ar " ser %i ces
Making good use of the library and its resources is vital for you to be a successful
student. Learn about library support and services and the importance of
information literacy at your Campus or Centre library.
St udent #ear ni ng Suor t & S#S'
SLS supports you through e-mentoring which is giving you learning tips and
advice through email.
You can email us at the following addresses:
Faculty of Arts, Law and Education: falesls@usp.ac.fj
Faculty of Science, Technology and Environment: fstetutorsupport@usp.ac.fj
Faculty of Business and Economics: fbe_sls@usp.ac.fj



(our )*ACT sessi on
commonly known as satellite tutorials. You are encouraged to attend the
scheduled sessions in the weeks shown in your study schedul

Here are some suggestions for getting the most out of these REACT sessions:

Note that before your REACT tutorial session begins your tutorial group will be
advised as to who all the participants are (regional and on
down names of your colleagues and which Campuses or Centres they are
listening from.

Speak slowly and pronounce your words clearly so that your colleagues can
understand what you are saying.

Be courteous and try to maintain a polite tone of voice.

When you want to address your tutorial group, press the "speak button", and aim
to maintain a 6-inch distance between your mouth and the microphone whilst
speaking. Please note that you may be using two different types of microphones
as shown below.






1. If you have quest
session you can do so by speaking to a microphone or through the chat
tool in REACT.
2. Try not to "steal the show". Remember that each of you will have
important points to add to discussions.
Contact your local USP Campus or Centre for further information on using the
REACT facilities.

Page
(our )*ACT sessi on
Apart from local tutorials,
USP uses a system known
as REACT which allows
you to hear and see your
course coordinator or tutor
as well as your fellow
students who are located in
the various campuses in the
USP region. You may get
presentations and notes in
addition to your scheduled
session. These are
commonly known as satellite tutorials. You are encouraged to attend the
scheduled sessions in the weeks shown in your study schedule.
Here are some suggestions for getting the most out of these REACT sessions:
Note that before your REACT tutorial session begins your tutorial group will be
advised as to who all the participants are (regional and on-campus). Try to note
your colleagues and which Campuses or Centres they are
Speak slowly and pronounce your words clearly so that your colleagues can
understand what you are saying.
Be courteous and try to maintain a polite tone of voice.
dress your tutorial group, press the "speak button", and aim
inch distance between your mouth and the microphone whilst
speaking. Please note that you may be using two different types of microphones
If you have questions or comments to communicate during your tutorial
session you can do so by speaking to a microphone or through the chat

Try not to "steal the show". Remember that each of you will have
important points to add to discussions.
local USP Campus or Centre for further information on using the

Page 11 of 49
Apart from local tutorials,
USP uses a system known
as REACT which allows
you to hear and see your
course coordinator or tutor
as well as your fellow
students who are located in
the various campuses in the
USP region. You may get
presentations and notes in
addition to your scheduled
session. These are
commonly known as satellite tutorials. You are encouraged to attend the
Here are some suggestions for getting the most out of these REACT sessions:
Note that before your REACT tutorial session begins your tutorial group will be
campus). Try to note
your colleagues and which Campuses or Centres they are
Speak slowly and pronounce your words clearly so that your colleagues can
dress your tutorial group, press the "speak button", and aim
inch distance between your mouth and the microphone whilst
speaking. Please note that you may be using two different types of microphones
ions or comments to communicate during your tutorial
session you can do so by speaking to a microphone or through the chat
Try not to "steal the show". Remember that each of you will have
local USP Campus or Centre for further information on using the


Onl i ne l ear ni ng
Moodle is USPs learning management system and will be used to support
learning in some of your courses.
+o, t o ! ogi n t o -ood! e
If your course has a Moodle component, the instructions below will help you
access the system.
You will need a computer connected to the Internet. The computer must have a
Web browser such as Internet Explorer or Firefox. Such a computer should be
available at your USP Campus
You will also be given a username and password by your local USP Campus.
Ste 1: Accessing -ood!e
Open your browser: Internet Explorer, Firefox, or other.
Type in the following at the address bar: http://ele
Press Enter.






Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and
use the Quick Links drop down menu to the left of the page and select
Online Learning (Moodle).
Ste 2: Username and ass,ord
You will come to a
Type your student number in the
Username box.
Type your student email (webmail)
password in the Password box.
Click Login.
Ste 3: Accessing "our course
You should now see a list of your courses. Click the Course Code and
Title of the course

Lost or forgotten password
Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fj
Page
Onl i ne l ear ni ng
Moodle is USPs learning management system and will be used to support
learning in some of your courses.
+o, t o ! ogi n t o -ood! e
Moodle component, the instructions below will help you
You will need a computer connected to the Internet. The computer must have a
Web browser such as Internet Explorer or Firefox. Such a computer should be
available at your USP Campus (if you dont already have one at home or work).
You will also be given a username and password by your local USP Campus.
Ste 1: Accessing -ood!e
Open your browser: Internet Explorer, Firefox, or other.
Type in the following at the address bar: http://elearn.usp.ac.fj/
Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and
use the Quick Links drop down menu to the left of the page and select
Online Learning (Moodle).
Ste 2: Username and ass,ord
You will come to a Login screen.
Type your student number in the
Type your student email (webmail)
password in the Password box.
Ste 3: Accessing "our course
You should now see a list of your courses. Click the Course Code and
Title of the course that you are enrolled in to enter. For example:

Lost or forgotten password
Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fj
Page 12 of 49
Moodle is USPs learning management system and will be used to support
Moodle component, the instructions below will help you
You will need a computer connected to the Internet. The computer must have a
Web browser such as Internet Explorer or Firefox. Such a computer should be
(if you dont already have one at home or work).
You will also be given a username and password by your local USP Campus.
arn.usp.ac.fj/
Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and
use the Quick Links drop down menu to the left of the page and select
You should now see a list of your courses. Click the Course Code and
that you are enrolled in to enter. For example:
Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fj

Page 13 of 49

St udy schedul e
To help you keep up with the course, we suggest you allocate at least 2.5 hours a
day to study. Plan your time using this study schedule.
Week no. and date
Unit Assignments and
tutorials
Week 1
1721 February
Auditing
An Introduction


Week 2
2428 February
Governance and the Auditor

Satellite Tutorial
Friday 28 February
12.00 2.00pm
Week 3
37 March
Professional Ethics, Independence and Audit Quality

Other Assurance Engagements and Quality Standards


Week 4
1014 March
The Auditor's Legal Liability

Satellite Tutorial
Friday 14 March
12.00 2.00pm
Week 5
1721 March
Overview of the Audit of Financial Statements

Client Evaluation and Planning the Audit


Week 6
2428 March
Audit Risk Assessment

Satellite Tutorial
Friday 28 March
12.00 2.00pm
Week 7
31 March4 April
MID-TERM TEST
513 April MID SEMESTER BREAK
Week 8
1418 April
Materiality and Audit Evidence

Satellite Tutorial
Friday 18 April
12.00 2.00pm
Week 9
2125 April
Test of Controls

Designing Substantive Procedures
Assignment 1
Due
25
th
April, 2013

Week 10
28 April2 May
Audit Sampling

Satellite Tutorial
Friday 2 May
12.00 2.00pm
Week 11
59 May
Auditing Sales and Receivables


Week 12
1216 May
Auditing Cash and Investments

Satellite Tutorial
Friday 16 May
12.00 2.00pm
Week 13
1923 May
Completing the Audit

Week 14
2630 May
The Auditors Report

Satellite Tutorial
Friday 30 May
12.00 2.00pm
Week 15
31 May8 June
STUDY BREAK
Weeks 16 & 17
920 June
EXAMINATIONS
Check with your USP Campus or Centre for the exact time and date of your examination.
* Fiji dates and times (GMT + 12hours)

Page 14 of 49

Assessment over vi e
This course is assessed in 2 ways:
Continuous assessment 50%
Final examination 50%
Total value 100%
Cont i nuous assessment
Continuous assessment makes up 50% of the final score and includes 1
assignments and a Mid-term test. It is weighted in the following way:
Assignment 1 15%
Mid-term Test 35%
Total value 50%

Assignment 1
This is worth 15% of your course mark and this included in this booklet. The due
date for the assignment is 25
th
April, 2014. You will have to load your assignment
on Moodle before mid-night on this date.
-id.term Tests
You will be required to sit a mid-semester test in week 7 of the semester. This
will account for 35% of your total course mark and will be 2 hours in duration.
Please confirm the date and time with your Campus or Student Academic
Services. A sample past test paper is available at the end of this book.
Fina! e/amination
The final examination will consist of a 3 hour paper at the end of your course.
This will account for 50% of your final course mark. Please confirm the date and
time with your Campus or Student Academic Services. A sample past final
examination paper is available at the end of this book. You need to attain a
minimum of 40% (20 marks) in the final exam to pass this course.


Page 15 of 49

!r adi ng Syst ems
a) The following grading system will be used by all faculties in awarding final
grades for academic performance in a course:
0ass Grades
Grades Percentage (%) Description
A+ 85+ Pass with Distinction
A 78 84 Pass with Distinction
B+ 71 77 Pass with Credit
B 64 70 Pass with Credit
C+ 57 63 Pass
C 50 56 Pass
1t2er 0ass Grades
R Restricted Pass
Aeg Aegrotat Pass
Comp Compassionate
Pas Pass or Competent
S Satisfactory

Note: Pas and S are used in circumstances where graded passes are inappropriate
such as in postgraduate thesis and Professional Diploma in Legal Practice.
Fai! Grades
Grade Percentage (%) Description
D 40 -49 Work below the standard required
for a pass
E 40 (Less than) Very weak performance or failure to
complete to the satisfaction of the
examiner such practical, field or
other work as may be prescribed
NC Not completed
NV Null and Void: This is awarded for
plagiarism or dishonest practice
U Unsatisfactory
Fail Not Competent
450
Note: Fail and U correspond with Pass and S above respectively.
0ro%isiona! )esu!ts:
I Incomplete
IP In progress


Page 16 of 49

b) Students shall be awarded an Aegrotat or Compassionate Pass if they satisfy
the conditions prescribed in Clauses 5.3 or 5.4 of these Regulations
respectively.

c) Students may be awarded a Restricted Pass if they satisfy the conditions
prescribed in Regulation 7.

d) Students who have been granted an extension of time past the last day of
lectures to complete work required for the final assessment of their course
shall be awarded the provisional grade of I (Incomplete) for an undergraduate
or postgraduate course assessed by coursework, or IP (In progress) for a
Supervised Research Project or thesis for a Masters degree or a thesis for a
PhD degree. At the end of the period of extension the School or Department
Assessment Meeting shall determine a final grade.

e) Students who have not submitted their masters or PhD thesis or Supervised
Research Project by the end of the maximum period of candidature prescribed
in the regulations shall be awarded the grade of NC (Not completed).


[Extracted from 2013 Handbook & Calendar, pp 449-450]


Page 17 of 49

Su"mi ssi on of assi gnment s
-ood!e
You should submit all your assignments by the dates given in your study schedule
or on your course Moodle page. Please upload them in the correct assignment
drop box.

It is very important that you keep to the study schedule and complete the
assignments so that you get regular feedback on your progress through this
course.
Cor r ect ! a$e! ! i ng o3 assi gnment s
Please be very careful to correctly label your assignments. On each assignment e-
copy file that you upload for marking, you should type:
the full name you used to enrol in this course;
your student identification number;
the correct course code and title; and
the assignment number.
Correct labelling will help ensure that the marker receives your assignment on
time, and that you get the credit for the work that you do. If your marker receives
one of your assignments late because you did not label it correctly, you may lose
marks.

#at e assi gnment s
If you expect to be over two weeks late in submitting an assignment, write to
your course coordinator. You should explain why you are late and suggest a
revised schedule that will allow you to complete the remaining assignments on
time.
Your course coordinator may mark a late assignment if there is a good reason for
its delay. In deciding whether to mark late assignments, your course coordinator
will give greater consideration to students in remote areas with little or no access
to their USP Campus, Centre or tutorial help.
USP reserves the right to decide whether or not to mark late assignments. It is in
your interest to send in your assignments on time. The assignment schedule gives
your course coordinator time to provide you with regular feedback on your
progress, before it is too late for you to use this information constructively in
your studies.
Your course coordinator will not mark any assignment received after the final
examination.


Page 18 of 49

#l agi ar i sm
Plagiarism is the copying of another persons creative work and using it as ones
own without explicitly giving credit to the original creator. Work copied
without acknowledgement from a book, from another students work, from the
internet or from any other source is plagiarism.
Plagiarism includes the following:

a) Copying of the published or unpublished words of another writer without
acknowledging the source using acceptable reference citation methods.
Thus, to; cut and paste from internet sources or lift sentences, ideas and
sections from a textual source qualifies as plagiarism.

b) Lifting or cutting and pasting extracts without quotation marks or
appropriate acknowledgement of sources.

c) Paraphrasing of content and ideas without proper acknowledgement of the
source.

d) The use of images, diagrams, photographs and material from blogs and
social networks, without acknowledgement.

e) Copying part or all, of another students assignment. In this instance,
student assignment refers to a piece of academic work submitted for
assessment purposes for any course, in past or current years at any
educational institutional including USP or any other university.

i) Collusion
Collusion means working with someone else to deceive or mislead to gain an
unfair academic advantage. It includes;
a) Submission of a paper that has been written by an author other than the
author credited for that piece of writing. This includes the use of paid
services of a student, or any other person that has been solicited for that
purpose.
b) Facilitating or enabling another student to plagiarise in any way.

ii) Cheating
Cheating involves acting in any way that directly contradicts the explicit rules
and guiding principles of that form of assessment. It applies in any form of
examination including short tests, quizzes and final examinations.

Cheating includes (inter alia):
a) Doing anything to gain an unfair or illicit academic advantage in an
examination;
b) Possessing, referring to or having access to any material, or to access the
internet crib notes or device containing information directly or indirectly
related to the subject matter under examination other than what is
explicitly approved for examination purposes;
c) Using a cell phone to communicate with any other student or person
inside or outside the examination venue;

Page 19 of 49

d) Copying from another student in a test or examination; enabling another
student to cheat in a test or examination;
e) Soliciting a person to sit a test or final examination in place of the student
enrolled; sitting a test or final examination in the place of another student;
f) Manipulation of scores in tests or examination or in any other form of
assessment; and
g) Enabling another student in any or a combination of any of the above.

[Extracted from 2013 Handbook & Calendar, pp 457-458]


Page 20 of 49

Assi gnment 1
Due date: Friday 25
th
April, 2013 at 12.00 am.
Value: 15 marks

Audi t *%i dence and 0r ocedur es

You are the audit senior assigned to the audit of ABC Pty Ltd, a wholly owned
subsidiary of a US parent. You have been requested by your partner to prepare an
audit plan for the statutory audit of the company for the year ended 31 December
2011. The following information has been provided to you:

i) The principal activities of ABC Pty Ltd are the importation and distribution
of modems and personal computers (PCs). It has offices in all capital cities
around Australia.

ii) All inventory is purchased either from its US parent or related companies in
Hong Kong and Taiwan.

iii) ABC Pty Ltd was incorporated in 1984 and had operated profitably until
1989 when significant losses were incurred, principally due to the downturn
in the economy, competition from other manufacturers and the availability
of cheaper clones.

iv) The company is well established in the modem market, however it has not
been doing well in the PC market for the reasons given above and has conse-
quently decided to 'get out' of the PC market and concentrate on enhancing
its position in the modem market. This decision has been communicated to
the public via computer journals and publications.

v) The stock level of PCs, modems and spares as at 30 October 2011 was
as follows:








vi) Your manager has advised you that two of the largest debtors have gone into
liquidation and the client has provided 50 per cent of these debts as they are
covered by credit insurance. There is no correspondence from the insurance
company regarding whether or when the claim in respect of these debts will
be settled. The insurance company has requested ABC to provide evidence
that the company has fulfilled all the conditions of the insurance policy
before it will settle. In view of previous experiences by the company with
such insurance claims, it is unlikely that any notification on recovery will be
$'000
Modems 4,426
PCs 3,142
Spares 1,563
Total 9,131

Page 21 of 49

received before year end. The financial controller has assured your manager
that they have complied with all the conditions of the insurance agreement.

vii) The company maintains fully computerised accounting systems for sales/
debtors, inventories and general ledger functions. Audit testing in prior years
has shown that controls over these systems appear to be strong. The sales/
debtors system matches cash receipts to outstanding items, and maintains
back order details where customer orders cannot be filled immediately.

viii) ABC has a wholly owned subsidiary in New Zealand which has been
making losses since its incorporation in 1988. As a result, the subsidiary has
a large deficiency in shareholders' funds. The New Zealand company figures
have not been consolidated in the attached financial information.

ix) A large stock of 486 PCs at a cost of $600,000 was ordered and is currently
in transit from the overseas parent. These PCs are the latest 4th generation
machines which have been brought to Australia for the first time. However,
since ABC has resolved to concentrate on the modem market, it has decided
not to release the 486 machines into Australia. The parent company from
which these stocks were purchased will not accept them back, but the
company's directors are looking to on-sell them to another related company
in Hong Kong.

x) Initial discussions with management have revealed that the company has sig-
nificant tax losses which management is keen to carry forward as an asset in
the year-end balance sheet.

xi) All modems and PCs sold by the company have a warranty of 12 months
from the date of sale.

xii) One modem stock item (XPIOOO) which was released in early 2010 was
found to have a factory fault. This defect only occurs in modems which are
used excessively. ABC had established a provision of $480,000 for returns
of this item, but only $80,000 of this provision had been utilised up to
October 2011. The returns of this item have slowed down to only one a
month. There are 100 units of this item still on hand.




Page 22 of 49

ABC Pty Ltd
Profit & loss Accounts


Unaudited
10 Months
Audited
12 Months

Note
31/10/2011 31/12/2010
$000 $000
Operating revenue 1 47,787 72,007
Operating profit (loss) (3,652) (5,561)
Abnormal items 2 - (1,583)
Income tax expense - -
Operating loss after income
tax
(3,652) (7,144)


Accumulated losses-at
beginning of financial year
(23,816) (16,672)
Accumulated losses at end
of financial period
(27,468) (23,816)




Page 23 of 49

ABC PTY LTD
Balance Sheets




Unaudited
10 Months
Audited
12 Months
Note

31/10/2011

31/12/2010
$'000 $'000
Current Assets


Cash 153 1,107
Receivables 3 10,353 14,310
Inventories 4 7,723 18,073
Other 5 - 40
Total Current Assets 18,229 33,530

Non-Current Assets


Investments 6 1 1
Fixed assets 7 1,800 2,166
Total Non-Current Assets 1,800 2,167
Total Assets 20,030 35,697

Current Liabilities
Creditors and borrowings 8 16,537 27,177
Provisions 9 890 1,672
Total Current Liabilities 17,427 28,849

Non-Current Liabilities


Creditors and borrowings 10 29,034 29,634
Provisions 11 37 30
Total Non-Current Liabilities 29,071 29,664
Total Liabilities 46,498 58,513
Net Assets (26,468) (22,816)

Shareholders' Equity


Share capital 12 1,000 1,000
Accumulated losses (27,468)

(23,816)
Total Shareholders' Equity (26,468) (22,816)




Page 24 of 49


Unaudited
10 months
Audited
12 months
31/10/2011 31/12/2010
Notes to Accounts
Note 1 - Operating Revenue
Modem sales 28,702 41,313
Personal computer sales 16,448 26,369
Other (spare parts) 2,637 4,325
47,787 72,007

Note 2 - Abnormal Items
Bad and doubtful debts expense - (1,743)
Applicable income tax - -
- (1,743)
Inventory obsolescence provision - 160
Applicable income tax - -
- 160
Abnormal items after income tax - (1,583)

Note 3 - Receivables
Trade debtors 5,687 9,133
Provision for doubtful debts (549) (505)
5,138 8,628
Amount owing by a controlled entity payable in
NZ dollars
5,031 5,540
Sundry debtors 184 142
5,215 5,682
10,353 14,310

Note 4 - Inventories
Finished goods 9,131 15,378
Provision for obsolescence (1,538) (1,899)
7,593 13,479
Goods in transit 130 4,667
Provision for obsolescence - (73)
130 4,594
7,723 18,073

Note 5 Other
Prepayments - 40

Note 6 Investment
Investment in New Zealand subsidiary at cost 1 1

Note 7 - Fixed Assets
Plant and equipment - cost 2,668 2,688
Accumulated depreciation (1,830) (1,574)
838 1,114

Page 25 of 49

Leased assets cost 1,517 1,517
Accumulated amortisation (555) (465)
962 1,052
Net Fixed assets 1,800 2,166

Note 8 - Creditors and Borrowings
Trade creditors and accruals 4,169 4,76l
Amounts owing to parent entity 11,144 21,081
Amounts owing to related entities 949 1,027
Lease liability 275 308
16,537 27,177

Note 9 Provisions
Annual leave 121 137
Warranty and returns 769 785
Research and development - 400
Legal - 350
890 1,672


Note 10 - Creditors and Borrowings
Bank loans - guaranteed by US parent 28,450 28,800
Lease liability 584 834
29,034 29,634

Note 11 Provisions
Long service leave 37 30

Note 12 - Share Capital
Authorised 1,000,000 ordinary shares of $1 each
Issued and fully paid 1,000,000 ordinary shares
of $1 each
1,000 1,000





Page 26 of 49

REQUIRED

1 a) What are the key factors that indicate that the company may have a going
concern problem?
[word limit 250; 5 marks]

b) What additional information would you obtain to evaluate this problem?
[word limit 250; 5 marks]

2. Assume the audit partner has concluded that the company is likely to remain
a going concern. Describe the substantive procedures to be performed to
address the key audit assertions for the following balances:
a) trade debtors
b) PC inventory
c) returns provision
d) operating revenue
e) amounts owing to parent entity
[word limit 200 for each of a, b, c, d, and e; total 5 marks]

Adopted and modified from: Trotman, K. and P. Roebuck. 1998. Case Studies in
Auditing, Butterworths, Second Edition.



Page 27 of 49

Sampl e $i d% &er m #aper Sem 2, 201'
You are given the following past test paper to help you to prepare for your test.
However, remember that the test paper that you will take this semester may not
follow exactly the same structure, format or content as this one.
The University of the South Pacific
Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and
Vanuatu.


School of Accounting & Finance



AF304: AUDITING

MID-SEMESTER EXAM SEMESTER 2, 2013
Face to Face Mode



Time Allowed 2 hours plus 10 minutes reading
70 Marks (30% of final grade)

I NST)UCTI 1NS
1. There are 4 Questions in this exam paper. Attempt ALL
questions.
2. Write your answers in the answer booklet provided.
3. Handwriting must be legible.
4. Use blue or black pen only.
5. This is a closed book examination. You are not permitted to
access any books, notes or other written materials.


Page 28 of 49

QUESTION ONE (25 marks in total25 Multiple Choice Questions)

Circle the best answer in the multiple-choice grid provided in the answer
booklet. Each question carries 1 mark.

1. Users of the audit report can reasonably expect the audited financial
statements to be:
a. complete, contain all necessary information and contain all financial
disclosures
b. a true and fair view of the organisations financial results
c. free from all errors
d. all of these choices

2. Management of a company is responsible for:
a. hiring the auditor
b. preparing the financial statements
c. the audit work papers
d. independence and obtaining evidence

3. The audit committee has oversight responsibilities for:
a. outside reporting
b. internal auditing
c. external auditing
d. all of these choices

4. The lead engagement and review partner must rotate every:
a. two years
b. three years
c. four years
d. five years

5. Which one of the following is an example of a conflict of interest for a
professional accountant?
a. performing tax services and a compilation engagement for a client
b. serving as legal counsel and an auditor for a client
c. providing an audit on internal financial controls and financial statements for a
client
d. being employed as a chief financial officer while serving as a member of the
board of directors for the same company

6. Which of the following is included in the APES 110 Code of Ethics for
Professional Accountants?
a. principles, rules of conduct and rulings
b. rules of conduct, interpretations and principles
c. principles, rules of conduct and rulings
d. principles and examples



Page 29 of 49

7. Thomas Lee, auditor, purposely omitted the confirmation of accounts
receivable because of his knowledge that management had grossly overstated
this account. Accounts receivable are material to the balance sheet. Lee is
most likely guilty of which of the following?
a. Fraud
b. a civil tort
c. Negligence
d. criminal liability

8. The case that led to auditors being able to argue that damages may be at least
in part caused by managements carelessness was:
a. Caparo case
b. AWA case
c. Pacific Acceptance case
d. London case

9. Who may sue an auditor under common law?
a. clients
b. foreseeable parties
c. foreseen parties
d. anyone with grounds

10. The Pacific Acceptance Case highlighted that the auditors duty includes all
of the following except:
a. report and audit, using due care and skill
b. promptly report fraud and warn of suspected fraud
c. supervise and review the work of inexperienced staff
d. audit just end-of-year balances

11. The failure to use due care and skill in the conduct of the audit is called:
a. diligence
b. negligence
c. fraud
d. Scienter

12. When the client and the auditor are both sued and judgement is rendered
against both, the auditor will be required to settle the entire judgement if the
client is bankrupt. Which of the following is a representation of the above?
a. private litigation reform
b. joint and several liability statutes
c. comparative fraud
d. the Securities Acts

13. The risk that financial statements are likely to be misstated materially without
regard to the effectiveness of internal control is which type of risk?
a. inherent risk
b. audit risk
c. client risk
d. control risk



Page 30 of 49

14. An auditor compares year-to-year account balances in order to perform
analytical procedures. This is an example of:
a. ratio analysis
b. trend analysis
c. internal control analysis
d. vertical analysis

15. What is the most important purpose that is achieved by having an auditor
write a formal engagement letter that is signed by the client?
a. documented proof of auditor responsibility for financial statements in
accordance with accounting standards
b. multiple degrees of legal separation of the client from the auditor
c. a locking-in of fees and timetable that must be adhered to by the client
d. a communication and clarification of the responsibilities and expectations
of the auditor and the client

16. Which of the following is typically not a significant risk factor that an auditor
will consider in the client acceptance of Stitch Magee Co.?
a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated
for securities violations four years earlier
b. Stitch Magee Co. is a public company in the high technology industry
c. Stitch Magee Co. is a manufacturing company that procures much of its
raw materials from the Suva area
d. Stitch Magee Co. sells 25% of its inventory to Nani Inc. which is owned
primarily by Nani Magee, the father of Stitch Magees accountant, director of
finance and 50% owner

17. Financial reporting risks are those risks that relate directly to the recording of
transactions and the presentation of financial data in an organisations
financial statements. Which of the following factors is not one of the key
factors affecting financial reporting risk?
a. the competence and integrity of management
b. the complexity of the companys transactions and financial reporting
c. the quality of the companys internal controls
d. an economic downturn

18. In the audit risk model, which of the risk components can be assessed by the
auditor?
a. Inherent risk
b. control risk
c. detection risk
d. both inherent risk and control risk

19. Internal control objectives are designed to assist the organisation in assuring
which of the following:
a. the organisation has effective and efficient operations related to its
overall strategy
b. the monitoring activities of the organisation are in compliance with applicable
laws and regulations
c. the assets of the organisation are maintained
d. the control environment is not impacted by the tone at the top

Page 31 of 49

20. Which of the following is not a reason that the auditor must gain an
understanding of the clients internal control system?
a. to better understand the client, its risks, and how it manages those risks
b. to assess control risk and identify the types of financial statement
misstatements that are most likely to occur
c. to plan direct tests of account balances to determine if misstatements have
occurred
d. all are reasons why auditors must gain an understanding of the clients
internal control system

21. Computer controls that are pervasive and affect every computerised system are
known as:
a. overall computer controls
b. general computer controls
c. application controls
d. processing controls

22. If the auditor of financial statements understands internal control and assesses
control risk as low, it is assumed that internal control:
a. will be tested to support the assessment
b. is not required to be tested as it is considered strong
c. is considered relatively weak and will not be tested
d. has been assessed erroneously by the auditor

23. Which is clearly a test of control?
a. confirmation to a customer of an accounts receivable balance
b. examination of a sample of purchase order records for electronic,
authenticated, authorisation
c. observing the controllers use of company owned equipment
d. sending a letter to the clients lawyer to determine litigation that is pending
between plaintiff and the defendant

24. The responsibility for operating an enterprise is delegated to the:
a. auditor
b. audit committee
c. management
d. board of directors

25. Auditing is important in a free market society because:
a. the public requires auditors to function as divisions of regulatory bodies
b. auditors detect all errors and fraud made by company employees
c. it provides reliable information based upon which to judge economic
performance
d. the auditor is an amiable insurance policy for investors





Page 32 of 49

QUESTION TWO (15 marks in total2 parts to the question)

Part A
The following are independent situations:
1. Mike and Davis were recently awarded the audit of Farms Foods Ltd for the
year ended 31 August 2013. Billy Fox, senior-in-charge, and an assistant
observed the inventory on 31 August. Upon completion of the inventory
observation, Walis Warp, Farms Foods Ltds controller, informed Fox that
the shipping supervisor had a small gift for him and the assistant. Fox asked
Warp what the gift was for, and Warp responded that they had always given
small gifts of food items to their previous auditors upon completion of the
inventory observation. Fox estimates that the value of the food is less than
$200.
2. Steve Racky has been asked by his audit client, Peter Plumbing Supply Pty
Ltd, to help implement a new internal control system. Racky will arrange
interviews for Peter Plumbing Supply Pty Ltds hiring of new personnel and
instruct and oversee the training of current client personnel.
3. Bob Lanzy is the partner-in-charge of the audit of Flee Ltd. Over the years, he
has become a golfing buddy of Flee Ltds CEO, Jim Hardy. During the
current year Lanzy and Hardy jointly purchased an exclusive vacation home
at Denarau. The vacation home represents more than 10 per cent of Lanzys
personal wealth.

Required

For each situation, indicate whether any Code of Ethics for Professional
Accountants has been breached. Give reasons. (9 marks)


Part B

Required

a) Outline three benefits of an effective audit committee. (3 marks)


b) Outline three limitations of a financial statement audit. (3 marks)






Page 33 of 49

QUESTION THREE (15 marks in total2 parts to the question)

You have been the auditor of Shally Pty Limited (SPL) for several years. The
audit report for the year ended 30 June 2012 was unqualified. In August 2012
SPL obtained a large loan from a finance company, RB Limited (RB), to provide
additional working capital. The company experienced severe trading problems
and was placed in receivership in May 2013.

Your firm has been notified by legal representatives of RB that they are taking
action against your firm based on the audit of the 30 June 2012 accounts. They
claim that the cause of SPLs failure related to both the inadequate recognition of
revenues and a fall in the value of inventories on hand, and that these problems
were apparent earlier than June 2012, but had not been adequately dealt with in
the financial statements. They also claim that they would not have given the loan
to SPL had those accounts been qualified.

Required

a) Outline your defence to this action taken by RB. Provide specific references to
case laws and auditing standards to support your answer. (10 marks)

b) Would your answer to (a) change if RB had written to your firm telling you
that they intend to make a loan to SPL and were relying on the audited financial
statements to assist them in making their decision? Explain. (5 marks)


QUESTION FOUR (15 marks in total2 parts to the question)

Part A
Your audit firm has been approached by a potential client. Rexo Entertainment
Pty Ltd, which recently made news in the financial press when its board of
directors reinstated the chief executive officer who had misappropriated cheques
totalling $15 000 (an amount that was immaterial to Rexo and the CEOs annual
salary). The board said the CEO was essential to operations and that his theft was
the result of mental problems rather than a sign of dishonesty.

Required

a) What procedure(s) would your audit firm use to investigate this client?
(3 marks)

b) Explain the considerations of your audit firm in deciding whether to accept the
client.
(3 marks)

Part B
Your client is Nolin Limited, a listed company that manufactures a wide range of
products used in the building industry. One range of products is manufactured in
Indonesia for sale in South-East Asian markets, while another range is
manufactured in Fiji for Fijian and New Zealand markets.


Page 34 of 49

You are completing the planning phase of the audit for the year ending 30 June
2013 and have the following information (consider each situation independently).

1. In the past few months, there has been increasing civil unrest in Indonesia. At
present, the accounting records at the Indonesian branch office appear to be
intact. However, your Indonesian branch office has received reliable advice that
at least half the stock has been burnt in a fire. The fire was caused by rioting and
therefore is not covered by insurance.
2. Rainaway roof tiles, sold mostly to large Fijian building companies, comprise
around 2% of total revenues. Over the last couple of months, several reports have
been received that the tiles are disintegrating in heavy rain, causing leakage and
property damage.
3. In accordance with current business practice, the board has approved a new
management compensation scheme. In future, the entire senior management team
(comprising 40 people and including the Finance Director) will receive a bonus
based on the increase in Nolin Limiteds net profit from year to year.

Required

Draft a work paper for review by the audit manager, explaining how each of your
allocated situations will affect the audit plan. (9 marks)



THE END

Page 35 of 49

Sampl e (i nal )*am #aper Sem 2, 201'
You are given the following past examination paper to help you to prepare for
your final examination. However, remember that the examination paper that you
will take this semester may not follow exactly the same structure, format or
content as this one.
The University of the South Pacific
Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and
Vanuatu.

School of Accounting & Finance

AF304: AUDITING
FINAL EXAM SEMESTER 2, 2013
Face to Face Mode


Time Allowed 3 hours plus 10 minutes reading
100 Marks (50% of final grade)

I NST)UCTI 1NS
6. There are 44 Questions in this exam paper. Attempt ALL
questions.
7. Write your answers in the answer booklet provided.
8. Handwriting must be legible.
9. Use blue or black pen only.
10. This is a closed book examination. You are not permitted to
access any books, notes or other written materials.
11. Weighting toward final exam is 50%. Minimum mark for final
exam is 20/50.
12. Total number of pages- 16


Page 36 of 49

QUESTION 1 to 40 (40 marks in total40 Multiple Choice Questions)
Circle the best answer in the multiple-choice grid provided in the answer
booklet. Each question carries 1 mark.
1. In determining the appropriate sample size an auditor does not need to
make judgments about:

A. sampling risk
B. expected failure rate
C. staff experience
D. tolerable failure rate

2. Auditors use sampling to gather evidence to:

A. test controls for the purpose of assessing control risk
B. test for compliance with company policies and government regulation
C. test individual items in account balances as a basis for determining whether
material misstatement exists
D. test all the transactions

3. Non-sampling risk deals with:

A. carrying out the appropriate audit procedure
B. drawing an incorrect inference from the sample results
C. inappropriately diagnosing clients problems
D. none of these choices

4. Which of the following circumstances would not be the appropriate
approach to use monetary unit sampling (MUS)?

A. the need to select a sample based on an items dollar amount
B. tolerable misstatement
C. sampling interval
D. tainting percentage



5. Which of the following most likely would not be considered an inherent
limitation of the potential effectiveness of an entitys internal control?

A. Incompatible duties.
B. Management override.
C. Mistakes in judgment.
D. Collusion among employees.


6. Internal control can provide only reasonable assurance of achieving entity
control objectives. One factor limiting the likelihood of achieving those
objectives is that

A. The auditors primary responsibility is the detection of fraud.
B. The board of directors is active and independent.
C. The cost of internal control should not exceed its benefits.
D. Management monitors internal control.


Page 37 of 49

7. An entity should consider the cost of a control in relationship to the risk.
Which of the following controls best reflects this philosophy for a large dollar
investment in heavy machine tools?

A. Conducting a weekly physical inventory.
B. Placing security guards at every entrance 24 hours a day.
C. Imprinting a controlled identification number on each tool.
D. Having all dispositions approved by the vice president of sales.

8. A proper segregation of duties requires

A. That an individual authorizing a transaction records it.
B. That an individual authorizing a transaction maintain custody of the asset that
resulted from the transaction.
C. That an individual maintaining custody of an asset be entitled to access the
accounting records for the asset.
D. That an individual recording a transaction not compare the accounting record
of the asset with the asset itself.

9. A company operates its own truck fleet. Rising operating costs have caused the
company to reassess its internal control. Which one of the following controls may
help to lower operating costs?

A. Preventive maintenance is performed independently of driver-requested
maintenance.
B. Each driver has a control card for fuel use at the self-service diesel fuel dock.
C. Maintenance and repair part orders are determined and placed by using an
EOQ system.
D. Parts and hand tools must be requisitioned from the parts department.

10. Which of the following is a step in an auditors decision to assess control risk
below the maximum?

A. Apply analytical procedures to both financial data and nonfinancial
information to detect conditions that may indicate weak controls.
B. Perform tests of details of transactions and account balances to identify
potential errors and fraud.
C. Identify specific controls that are likely to detect or prevent material
misstatements.
D. Document that the additional audit effort to perform tests of controls exceeds
the potential reduction in substantive testing.



Page 38 of 49

11. Which of the following is a false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives and
procedures.
B. Audit objectives should be developed in light of management assertions about
the financial statement components.
C. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.
D. The auditor should resolve any substantial doubt about any of managements
material financial statement assertions.

12. Which of the following statements concerning audit evidence is true?

A. To be competent, audit evidence should be either persuasive or relevant, but
need not be both.
B. The measure of the validity of audit evidence lies in the auditors judgment.
C. The difficulty and expense of obtaining audit evidence concerning an account
balance is a valid basis for omitting the test.
D. A clients accounting data can be sufficient audit evidence to support the
financial statements.

13. Which of the following is the best explanation of the difference, if any,
between engagement objectives and procedures?

A. Procedures establish broad general goals; objectives specify the detailed work
to be performed.
B. Objectives are tailor-made for each engagement; procedures are generic in
application.
C. Objectives define specific desired accomplishments; procedures provide the
means of achieving objectives.
D. Procedures and objectives are essentially the same.

14. The relationship between the required understanding of the internal control
structure and the preliminary audit strategy is that:

A. normally, greater understanding is required when the lower assessed level of
control risk approach is used.
B. normally, greater understanding is required when the primarily substantive
approach is used.
C. no understanding is required in the planning stage unless tests of controls are
a planned part of the strategy.
D. normally, less understanding is required when the lower assessed level of
control risk approach is used.

15. The primary difference between an audit of the balance sheet and an audit of
the income statement is that the audit of the income statement addresses the
verification of
A. Transactions.
B. Authorizations.
C. Costs.
D. Cutoffs.

Page 39 of 49

16. The competence of evidence available to an auditor is least likely to be
affected by

A. The relevance of such evidence to the financial statement assertion being
investigated.
B. The relationship of the preparer of such evidence to the entity being audited.
C. The timeliness of such audit evidence.
D. The sampling method employed by the auditor to obtain a sample of such
evidence.

17. Which of the following statements concerning evidence is true?

A. Competent evidence supporting managements assertions should be
convincing rather than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence
created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor
in deciding what evidence should be obtained.
D. A clients accounting data cannot be considered sufficient audit evidence to
support the financial statements.


18. Which of the following elements ultimately determines the specific auditing
procedures that are necessary in the circumstances to afford a reasonable basis for
an opinion?

A. Auditor judgment.
B. Materiality.
C. Audit risk.
D. Reasonable assurance.


19. Assuming a low assessed level of control risk, which of the following audit
procedures is least likely to be performed?

A. Physical inspection of a sample of inventory.
B. Search for unrecorded cash receipts.
C. Obtainment of a client representation letter.
D. Confirmation of accounts receivable.


20. Each of the following might, by itself, form a valid basis for an auditor to
decide to omit a test except for the

A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.



Page 40 of 49

21. In evaluating an entitys accounting estimates, one of an auditors objectives
is to determine whether the estimates are

A. Not subject to bias.
B. Consistent with industry guidelines.
C. Based on objective assumptions.
D. Reasonable in the circumstances.

22. During the audit of fair value measurements and disclosures (FVMD), the
auditor must

A. Understand the components of internal control, but need not specifically
obtain an understanding of the entitys process for determining FVMD.
B. Use the understanding of the audited entitys process for determining FVMD
to assess the risk of material misstatement.
C. Determine that the entity has measured fair values using discounted cash flows
whenever feasible.
D. Address only the initial recording of transactions.

23. Analytical procedures can best be categorized as

A. Substantive tests.
B. Tests of controls.
C. Qualitative tests.
D. Budget comparisons.

24. Analytical procedures enable the auditor to predict the balance or quantity of
an item under audit. Information to develop this estimate can be obtained from all
of the following except

A. Tracing transactions through the system to determine whether procedures are
being applied as prescribed.
B. Comparison of financial data with data for comparable prior periods,
anticipated results (e.g. budgets and forecasts), and similar data for the industry in
which the entity operates.
C. Study of the relationships of elements of financial data that would be expected
to conform to a predictable pattern based upon the entitys experience.
D. Study of the relationships of financial data with relevant nonfinancial data.

25. For all audits of financial statements made in accordance with generally
accepted auditing standards, the use of analytical procedures is required to some
extent
In the As a In the
Planning Substantive Review
Stage Test Stage

A. Yes No Yes
B. No Yes No
C. No Yes Yes
D. Yes No No


Page 41 of 49

26. Auditors are often concerned with the possibility of overstatement of sales
and receivables. However, management may also have reasons for understating
these balances. Which of the following would explain understatement of sales
and receivables?

A. To window-dress the financial statements.
B. To avoid paying taxes.
C. To meet budgets and forecasts.
D. All of the answers are correct.

27. Tracing bills of lading to sales invoices provides evidence that

A. Shipments to customers were invoiced.
B. Shipments to customers were recorded as sales.
C. Recorded sales were shipped.
D. Invoiced sales were shipped.

28. An auditor observed that a client mails monthly statements to customers.
Subsequently, the auditor reviewed evidence of follow-up on the errors reported
by the customers. This test of controls was most likely performed to support
managements financial statement assertion(s) of

Presentation and Rights and
Disclosure Obligations

A. Yes Yes
B. Yes No
C. No Yes
D. No No

29. A companys sales cutoff is December 31. All goods sold are shipped FOB
destination, and the company records sales 3 days after shipment. The following
sales were recorded as indicated: (Amounts In Thousands)

Date Month Selling
Shipped Recorded Price Cost

December 28 December $182 $190
December 29 December 60 50
December 30 January 144 145
January 2 December 230 215
January 5 January 182 174

Ignoring tax effects, the net effect on income for the month ended December 31
of any failures to observe a proper cutoff was

A. $(1,000)
B. $15,000
C. $24,000
D. $25,000


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30. An auditor observed the auditees annual physical inventory on December 15.
The auditee adjusted the inventory balance and detailed perpetual inventory
records to agree with the count. Goods are shipped FOB shipping point. Listed
below are four material items discovered when the auditor tested the sales cutoff
as of the clients fiscal year-end at December 31. Which item does not require an
adjusting entry on the auditees books?
Recorded Credited to
Shipped as Sale Inventory

A. 1/1 12/31 12/31
B. 12/31 1/3 12/31
C. 12/14 12/16 12/16
D. 12/9 12/20 12/12

31. The negative request form of accounts receivable confirmation may be used
when the

Combined
Assessment Level Number of Consideration
of Inherent and Small by the
Control Risk Is Balances Is Recipient Is

A. Low Many Likely
B. Low Few Unlikely
C. High Few Likely
D. High Many Likely

32. During the process of confirming receivables as of December 31, 20X1, a
positive confirmation was returned indicating the balance owed as of December
31 was paid on January 9, 20X2. The auditor would most likely

A. Determine whether there were any changes in the account between January 1
and January 9, 20X2.
B. Determine whether a customary trade discount was taken by the customer.
C. Reconfirm the zero balance as of January 10, 20X2.
D. Verify that the amount was received.

33. Which of the following procedures will an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests?

A. Review the cash receipts journal for the month prior to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.



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34. Which of the following procedures can be performed only in the subsequent
period?

A. Examination of data to determine that a proper cutoff has been made.
B. Tests of the details of balances.
C. Tests of the details of transactions.
D. Reading of the minutes of the board of directors meetings.

35. Which of the following statements best expresses the auditors responsibility
with respect to events occurring after the balance-sheet date?

A. The auditor has no responsibility for events occurring in the subsequent period
unless these events affect transactions recorded on or before the balance-sheet
date.
B. The auditors responsibility is to determine that transactions recorded on or
before the balance-sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period
and should extend all detailed procedures through the last day of field work.
D. The auditor is responsible for determining that a proper cutoff has been made
and for performing a general review of events occurring in the subsequent period.

36.Which of the following procedures should an auditor ordinarily perform
regarding subsequent events?

A. Compare the latest available interim financial statements with the financial
statements being audited.
B. Send second requests to the clients customers who failed to respond to initial
accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the clients audit
committee.
D. Review the cutoff bank statements for several months after the year-end.

37. After an audit report containing an unqualified opinion on a nonpublic
clients financial statements was dated and the financial statements issued, the
client decided to sell the shares of a subsidiary that accounts for 30% of its
revenue and 25% of its net income. The auditor should

A. Determine whether the information is reliable and, if determined to be reliable,
request that revised financial statements be issued.
B. Notify the entity that the auditors report may no longer be associated with the
financial statements.
C. Describe the effects of this subsequently discovered information in a
communication with persons known to be relying on the financial statements.
D. Take no action because the auditor has no obligation to make any further
inquiries.




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38. Which of the following best describes why an independent auditor is asked to
express an opinion on the fair presentation of financial statements?

A. It is difficult to prepare financial statements that fairly present a companys
financial position, results of operations, and cash flows without the expertise of
an independent auditor.
B. It is managements responsibility to seek available independent aid in the
appraisal of the financial information shown in its financial statements.
C. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements.
D. It is a customary courtesy that all shareholders receive an independent report
on managements stewardship in managing the affairs of the business.

39. On January 2, 20X1, the Retail Auto Parts Co. received a notice from its
primary suppliers that effective immediately all wholesale prices would be
increased 10%. On the basis of the notice, Retail Auto Parts Co. revalued its
December 31, 20X0 inventory to reflect the higher costs. The inventory
constituted a material proportion of total assets; however, the effect of the
revaluation was material to current assets but not to total assets or net income. In
reporting on the companys financial statements for the year ended December 31,
20X0, in which inventory is valued at the adjusted amounts, the auditor would
most likely

A. Express an unqualified opinion provided the nature of the adjustment and the
amounts involved are disclosed in notes.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.

40. The following explanatory paragraph was included in an auditors report to
indicate a lack of consistency:
As discussed in note T to the financial statements, the company changed its
method of computing depreciation in 2001.
How should the auditor report on this matter if the auditor concurred with the
change?
Type of Location of
Opinion Explanatory Paragraph

A. Unqualified Before opinion paragraph
B. Unqualified After opinion paragraph
C. Qualified Before opinion paragraph
D. Qualified After opinion paragraph






Page 45 of 49

Question 41 (15 marks)
Field is auditing the financial statements of Miller Mailorder Ltd (MMI) for the
year ended 30 June 2011. Field has compiled a list of possible risks, including
both errors and fraud, which may result in the misstatement of MMIs financial
report and a corresponding list of internal controls that, if properly designed and
implemented, could assist MMI in preventing or detecting the errors and fraud.

REQUIRED
For each possible risk (possible errors and fraud) numbered 1 through 15, select
one internal control procedure from the following answer list that, if properly
designed and implemented, most likely could assist MMI in preventing or
detecting the errors and irregularities. Each response in the list of controls may be
selected once, more than once or not at all. (1 mark each).

POSSIBLE ERRORS AND FRAUD
Invoices for goods sold are posted to incorrect customer accounts.
1. Goods ordered by customers are shipped but are not billed to anyone.
2. Invoices are sent for shipped goods but are not recorded in the sales
journal.
3. Invoices are sent for shipped goods and are recorded in the sales journal
but are not posted to any customer account.
4. Credit sales are made to individuals with unsatisfactory credit ratings.
5. Credit sales are made for over the credit limit amount.
6. Goods are removed from inventory for unauthorized orders.
7. Goods shipped to customers do not agree with goods ordered by
customers.
8. Invoices are sent to allies in a fraudulent scheme, and sales are recorded
for fictitious transactions.
9. Customers cheques are received for less than the customers full account
balances, but the customers full account balances are credited.
10. Customers cheques are misappropriated before being forwarded to the
cashier for deposit.
11. Customers cheques are credited to incorrect customer accounts.
12. Different customer accounts are each credited for the same cash receipt.
13. Customers cheques are properly credited to customer accounts and are
properly deposited, but errors are made in recording receipts in the cash
receipts journal.
14. Customers cheques are misappropriated after being forwarded to the
cashier for deposit.
15. Invalid transactions granting credit for sales returns are recorded.


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INTERNAL CONTROL PROCEDURES

a) Shipping clerks compare goods received form the warehouse with the
details on the shipping documents.
b) Approved sales orders are required for goods to be released from the
warehouse.
c) Monthly statements are mailed to all customers with outstanding
balances.
d) Shipping clerks compare goods received from the warehouse with
approved sales orders.
e) Customer orders are compared with the inventory master file to determine
whether items ordered are in stock.
f) Apply credit limit to each sale.
g) Daily sales summaries are compared with control totals of invoices.
h) Shipping documents are compared with sales invoices when goods are
shipped.
i) Sales invoices are compared with the master price file.
j) Customer orders are compared with an approved customer list.
k) Sales orders are prepared for each customer order.
l) Control amounts posted to the accounts receivable ledger are compared
with control totals of invoices.
m) Sales invoices are compared with shipping documents and approved
customer orders before invoices are mailed.
n) Pre-numbered credit memos are used for granting credit for goods
returned.
o) Goods returned for credit are approved by the supervisor of the sales
department.
p) Remittance advices are separated from the cheques in the mailroom and
forwarded to the accounting department.
q) Total amounts posted to the accounts receivable ledger from remittance
advices are compared with the validated bank deposit slip.
r) The cashier examines each cheque for proper endorsement.
s) Validated deposit slips are compared with the cashiers daily cash
summaries.
t) An employee, other than the bookkeeper, periodically prepares a bank
reconciliation.
u) The same employee who issues receiving reports evidencing actual return
of goods approves sales returns.



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Question 42 (20 marks)

The following client- prepared bank reconciliation is being examined by Kautz
during an examination of the financial report of Concrete Products Ltd:


CONCRETE PRODUCTS LTD
BANK RECONCILIATION 31 DECEMBER 2012

Balance per bank (a) $18 375.91

Deposits in transit (b): 30 December 1471.10

31 December 2840.69 4311.79
Outstanding cheques ( c ):

837 6000.00

1941 671.80

1966 320.00

1984 1855.42

1985 3621.22

1986 2576.89

1991 4420.88 (19 466.21)

Subtotal 3221.49

NSF cheque returned 29 Dec. (d) 200.00

Bank charges 5.50

Error cheque no. 1932 148.10

Customer note collected by the bank
($2750 plus $275 interest) (e)
(3025.00)

Balance per books (f) $ 550.09





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REQUIRED

Identify one or more audit procedures that should be performed by Kautz in
gathering evidence in support of each of the items (a) through (f) in this bank
reconciliation. (Equal marks).

Question 43 (5 marks)
Subsequent events/post-audit discovery of facts
The financial year Hadrian Ltd ended on 30
th
June 2009. Your auditors report
was signed on 25
th
August 2009 and the financial statements were issued on 10
th

September 2009. Listed below are events that occurred or are discovered after the
end of the financial year. Assume that each has a material effect on the financial
statements.
1. 1 August 2009 A Lawsuit was filed against Hadrian for damages that
allegedly occurred before 30 June 2009. In the opinion of Hadrians
Lawyers, there is a danger of a significant loss.
2. 15 August 2009 You discovered that debtor A of Hadrian went bankrupt
on 10 August 2009. The most recent sale had taken place on 25 May 2009
and no transactions had occurred since that date.
3. 1 September 2009 You discovered that a legal action commenced
against Hadrian in relation to a faulty product sold in May 2009.
4. 30 September 2009 You discovered that debtor B of Hadrian went
bankrupt on 15 July 2009. Sales associated with this debtor occurred
before the end of the financial year.
5. 30 September 2009 You discovered that debtor C of Hadrian went
bankrupt on 25 September 2009. The sale had taken place before the end
of the financial year, but the amount had appeared collectable at the date
on which the auditors report was signed.
Required
a) Indicate your responsibilities for each of the above events. 1 mark each)







Page 49 of 49

Question 44 (20 marks)
Preparation of the authors report- various circumstances
Hillgrove Ltd engaged Lucy Chow to perform its audit for the year ended 31
December 2009. The financial statements for the previous year were audited by
Charles Brown, who expressed an unqualified opinion.
Lucy Chows audit working papers contain the following information that does
not appear in the 31 December 2009 financial statements of Hillgrove:
1. During the year, Hillgrove changed its method of valuing inventory to the
first- in- first out method from the weighted average method.
Management made this change because it believes first in-first out more
clearly reflects net income by providing a closer matching of costs and
revenues. The change had the effect of reducing inventory at 31
December 2009 by $65 000. The effect of the change on previous years
was immaterial. Lucy firmly supports the companys position.
2. The company refused to capitalize certain lease obligations for equipment
acquired in 2009. Capitalisation of the leases in accordance with IAS 17
would have increased assets and liabilities by $500 000 and $650 000
respectively. Lucy concludes that the leases should have been capitalized.
Required:
Prepare the auditors report that Lucy Chow should issue for the year ended 31
December 2009. Marks will awarded for appropriateness of audit report.


THE END