1D

The high level of fees give rise to a self-interest threat and an intimidation threat, because Otillie
& Co may fear losing the work from this client, so may be reluctant to take any actions that could
cause this to happen, for example giving a modified audit opinion. If the other services had a
direct impact on the financial statements there could potentially be a self-review threat, but
there is no indication of this in the scenario and the question specifically focusses on the threats
which may arise due to the high level of fees. There is no mention of providing services that
would lead to an advocacy threat.

2C
Using separate teams will not address the self-interest threat from the fee levels as separating
the teams will not alleviate the firm’s potential financial dependence on Grisaille Co.

3A
Long association with a client creates a familiarity threat. As the company is not listed, Rachel
can continue as audit engagement partner provided appropriate safeguards are put in place,
such as independent partner/quality control reviews.

4D
The ACCA Code of Ethics and Conduct states that contingent fee arrangements are not allowed
for non-assurance services provided to audit clients if the fee will be significant to the firm,
therefore Option D is the most appropriate answer.

53B
As the previous audit manager has taken up employment with the client as the finance director,
there is a familiarity threat due to the ongoing relationship between the old and new audit
manager. The familiarity threat is not so severe that the firm would need to resign. It is not
practical to prevent the audit manager speaking to the finance director during an audit as this
will reduce the efficiency and effectiveness of the audit. A new audit manager should be
appointed.

6C
Trade payables may be a risk for certain clients, but in relation to the other risks stated, is
unlikely to be a significant risk. With intangibles there is a risk that some projects may not reach
the final development stage and hence should be expensed rather than capitalised. Work in
progress is inherently subjective due to the estimation of percentage of completion and
absorption of overheads into the valuation. The loan obtained in the year should be presented in
non-current liabilities and adequate disclosures need to be made, especially regarding the
covenant.

7D
The directors’ of Abrahams Co will be keen to avoid breaching the loan covenants which
increases the risk of manipulation of the financial statements and therefore increases the
inherent risk. The change in accounting system increases the control risk and the short deadline
and third party warehouses both increase detection risk.
8B
It would not be possible to agree the total cost because the standard cost is made up of a number of
costs, including materials and labour. It would be more appropriate to obtain a breakdown of the
standard costs and agree a sample of these costs to actual invoices or wage records.

9 A AND C
Given the changeover of IT systems during the year, it would not be appropriate to increase the
reliance on controls, it may even be necessary to reduce the reliance and increase the substantive
procedures performed. Materiality should be set based on appropriate factors such as knowledge of
the client and associate risk and should not be adjusted just to reflect a tight reporting deadline.

10 D
Materiality ranges using traditional benchmarks:
Revenue (½ – 1%) $125,000 - $250,000
Profit before tax (5% - 10%) $80,000 - $160,000
Given the risks relating to the audit of Abrahams Co, it is likely that materiality would be set at the
lower end of the materiality scale to reflect the increased level of audit risk. Option D is 1.2% of
revenue and 18.8% of profit before tax and is therefore too high based on the traditional benchmark
calculations. Options A, B and C all sit within the ranges calculated above.

11 B
Discounts received relate to the purchases system.

12 C
It would not be necessary to complete a new questionnaire unless the system has completely
changed.

13 D
Comparing the invoice to the GDN means the invoice is only raised for goods actually taken by the
customer, i.e. for valid sales. Option C would require GDNs to be matched to invoices rather than the
other way around.

14 TOC, SP, SP, TOC

Option 1 is a test of control as the focus is obtaining evidence that the accounts staff have signed the
GDN which is a control in place to confirm the GDN that the GDN agrees to the invoice.
Option 2 is a substantive procedure as the focus is obtaining evidence about the cut-off assertion.
Option 3 is a substantive procedure as the focus is obtaining evidence about the valuation assertion.
Option 4 is a test of control as the focus is obtaining evidence that the goods are being collected by an
authorised customer which is a control to confirm the customer has been credit checked to reduce the
risk of irrecoverable debts.
15 A AND C
Customers being able to exceed their authorised credit limit, means there is a risk of irrecoverable
debts. If goods despatch notes are not sequentially numbered, there is no way to check that every
order that has been despatched has been recorded in the system and invoiced. This means there is
a risk that goods are taken away by customers and an invoice is not raised, resulting in an
understatement of revenue. Risk B is not relevant because customers order and take their goods
away at the same time, so there is no time difference and hence no risk of delay. Risk D is not
relevant because neither deficiency relates to the recording of invoices.
16 Wickets

(a) Wages system

Deficiency Recommendation Test of control
Employees arriving and leaving the A supervisor should be Observe employees
premises are not supervised in their present at the start of each arriving and leaving to
clocking in and out. Employees could shift to ensure each ensure that a supervisor is
clock in for their friends increasing cost employee only clocks in present, and monitors the
for the company as it will be paying for once. Alternatively, CCTV clocking in and out
hours not worked. could be implemented to process.
record the process. Alternatively, observe the
CCTV camera in place and
inspect records confirming
the CCTV footage has been
reviewed to ensure
employees only clock in
and out for themselves.
At the end of the week clock cards are Mr Lamb should review all Inspect the clock cards for
not reviewed or authorised before being clock cards prior to sending evidence of Mr Lamb’s
processed. to the accounts department review and authorisation.
Errors, such as omissions and incorrect and if the hours recorded are Enquire of Mr Lamb of the
timing of clocking in and out would not in accordance with his process he undertakes and
be identified. There could also be expectations he should then how regularly it is
deliberate irregularities such as authorise them for performed.
falsification of the arrival and departure processing. This could be
times. This would result in additional combined with his other
cost for the company. records such as booking of
hours worked to cost cards.
There are no batch controls over the Batch totals should be used Review the payroll
input of wages information into the to ensure that employee processing for evidence of
system. details are entered once and batch totals being used.
This could result in employees details entered correctly.
being either:
 incorrectly entered.
 entered more than once.
 being omitted.
This could result in employee complaints
due to incorrect amounts being paid.
No checks are performed on the Sample checks should be For a sample of months,
calculations. performed by Miss Smith to review a sample of the
It is possible that errors occur that will ensure accuracy of the calculations performed by
not be detected resulting in incorrect system calculations. Miss Smith to confirm that
payments being made to employees or checks are performed
employees being paid twice or not at all throughout the year.
The bank payment list is Mr Lewis should review the Review the bank payment list
authorised without review of the names and amounts of for evidence of a more
individual amounts. Fraud could employees and compare thorough review by Mr Lewis
go undetected as Mr Lewis does this with the hours worked such as supporting
not review the detail. Fictitious as calculated by Mrs Gooch. documentation being provided
employees could be included with the list and annotations
within the total that would not be on the payment list confirming
identified. Comparison with the the individual amounts have
previous month may not detect been checked against the
errors if there have been different hours worked calculated by
levels of overtime worked. Mrs Gooch.
A junior accounts clerk, Miss The computer system has a Obtain a list of people with
Smith, has access to master file hierarchical password access to the master data file
information, including employee structure and therefore the from the IT department.
standing data. Miss Smith is too creation of new accounts Review the list to ensure only
junior to have access to standing should be taken out of the responsible officials have
data. Information could be at risk hands of Miss Smith. Mrs access. Review a sample of
of fraud or error. Gooch should make changes exception reports to ensure
to the standing data. An changes are reviewed by Mr
exception report should be Lewis for validity.
produced when changes are
made and Mr Lewis should
review these changes to
ensure they are valid.
Mr Lamb can create or delete Changes to employees such For a sample of leavers and
employee records by passing as starters or leavers should joiners, review the starters and
information to Miss Smith only be made on receipt of a leavers forms and confirm that
without authorisation. Employees starters or leavers form from the details have been changed
could leave and not be removed the relevant department with effect from the relevant
from the system or employees manager. Changes to date on the form and review
listed as new joiners could in fact employees should be made for evidence of authorisation
be fictitious. There is also the by Mrs Gooch and by Mr Lewis.
possibility of a mistake in authorised by Mr Lewis.
employees being removed from
the system from the wrong date.
Backup copies of data processed Back-up disks should be Ask management to show you
are not kept in a secure or fire retained outside the where backups are stored to
proof place. Backups are required accounts office in a fire ensure they are in a fire proof
for any data reconstruction. If the proof cabinet. cabinet.
system crashed, data would be
lost and could not be recreated.
(b) Substantive procedures over payroll

● Compare the weekly payroll cost to prior year to identify any unexpected variations. Discuss any
unusual variations with management.
● Cast the payroll for each week and ensure that net pay plus deductions agree to gross pay. Agree
the total payroll expense from the nominal ledger to the trial balance and financial statements.
● Agree the total net pay from the bank payment list to the bank statements.
● Obtain a sample of payslips and re-perform the calculation of statutory deductions to verify
accuracy.
● Recalculate gross pay using hours worked and wage rates to verify accuracy.
● Agree the hours worked to the supporting clock cards to verify accuracy.
● Agree the hourly rate for both basic and overtime hours to personnel records.
● Select a sample of starters and leavers and agree their starting/leaving date to personnel records.
17 Dean Manufacturing

(a) Deficiency Significance

Ordering of goods
No authorisation is required in order It will be difficult to check that all goods ordered are for the
for employees to order goods. purpose of the business.
The order forms are not pre- It will be difficult to check that all commitments have been
numbered. recorded and, as a result, that liabilities are not understated.
Employees place orders as they wish. There is no central control over re-order levels and therefore
efficiency of the business may be lost. Also, employees may
place orders for personal items, causing loss for the company.
There is no central buying The best prices may not be achieved without a central buying
department. No evidence of an policy.
authorised supplier list being used.
Receipt of goods
No physical check of goods received The quality of goods received may not be satisfactory with the
to purchase order or advice note or consequence that inventory and liabilities may be overstated.
for quality control.
No check of supplier’s delivery note Goods which have not been ordered could be accepted
to purchase order. incurring additional cost for the company.
A sequentially numbered goods Completeness of goods received cannot be verified as the
received note is not completed. supplier despatch note will use the suppliers referencing
system. As multiple suppliers will be used, goods received
notes with Dean Manufacturing’s referencing system should be
prepared.
Goods inward clerk has receipt of The effect on year-end inventories of under supply of goods or
both delivery note and the retained misappropriation will depend upon how the year-end
copy of the order form giving her inventory is calculated. As it will most likely be based upon a
the capacity to misappropriate year-end count the statement of financial position value will be
inventory by altering the delivery unaffected. However purchases will be overstated with a
note and order form. consequential reduction in profit.

Receipt of invoice
No checks exist to agree quantities Purchases and liabilities may be misstated if the company is
invoiced to quantities ordered or over or under invoiced.
received.
Invoice is recorded before Inventory value, based upon amount invoiced, may be
authorisation. misstated due to inclusion of sub-standard goods. Purchases
and liabilities could be overstated by recording invoices not
authorised.
Authorisation
No reliable evidence exists to Possible overstatement of purchases and liabilities by invoices
ensure all invoices are not being passed for authorisation by person ordering the goods.
authorised by management (i.e.
invoices not initialled).
No procedures to ensure Loss of invoices in transit could occur which may result in
safekeeping and return of understatement of liabilities in the nominal ledger account
invoices. which would not be picked up until the purchase ledger control
account reconciliation was done. At the year-end reconciling
differences could occur.
Loss of invoices would mean loss of underlying documentation,
with consequential loss of audit trail.
Recording
There is no segregation of duties Fraud could occur and would be able to be concealed, for
between recording in the example, purchases for a nonbusiness use could be diguised.
nominal ledger and purchase
ledger.
No arithmetic check on input of Errors on purchase invoices will not be detected leading to
purchase invoices. possible over or underpayments of purchases and misstated of
the purchases figure in the financial statements.
Payments to suppliers and reconciliations
No segregation of duties. The validity of the purchases, inventory and liabilities balances in
Although the cashier pays the financial statements is called into question.
suppliers, she does so only on
the advice of the purchase
ledger clerk.

(b) Additional or extended procedures

Given the deficiencies identified above, no reliance can be placed on the purchases system and, as a
result, full substantive testing must be performed.
The emphasis of the substantive tests would be to detect the possible errors identified above, i.e.
 Understatement or overstatement of purchases and liabilities.
 Misstatement of inventory.
The areas in which normal audit work would be extended or further tests introduced would be as
follows:
Cut-off testing
 Agreeing delivery notes to invoices and into the purchase day book and payables ledger. Tests of
inventory received both sides of the year-end should be done.
 Post year-end cash book review agreeing post year-end payments to relevant invoice and
delivery note and ensuring inclusion in the correct period.
 Post year-end invoice review for further liabilities regarding inventory received before the year-
end.
Misstatement of inventory
 Extended quantity checks at year-end inventory count with particular emphasis on overstatement.
 Review of goods for faulty items, and ensure adjustments are made accordingly.
 Extended testing of post year-end sales in order to detect possible write downs to net realisable
value.

Overstatement of purchases and liabilities

 Analytical review of costs per area in order to identify over expenditure.
 Extended testing in the high risk areas identified above.
 Careful scrutiny of invoice details to orders and delivery notes.
 Scrutiny of orders and delivery notes for evidence of alteration.
 Inspection of purchase orders and delivery notes for recognised suppliers.
 Agreement of cash payments per cash book to the payables ledger and invoice/supplier
statements/remittance advice.
 Review and agreement of month-end payables ledger control account reconciliations and supplier
statement reconciliations.
 Perform accounts payable circularisation in order to agree year-end balances with a sample of
suppliers.
18 (a) Substantive procedures for trade receivables –

 Obtain the aged receivables listing and agree to the balance on the sales ledger control
account and trial balance.
 Review the aged trade receivables ledger to identify any slow moving or old balances, discuss
the status of these balances with the credit controller to assess whether they are likely to pay.
 Select a representative sample of trade receivables and review for any after-date cash
receipts. Ensure that a sample of slow moving/old receivable balances is also selected.
 Review customer correspondence to identify any balances which are in dispute or unlikely to
be paid and discuss with management.
 Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
 Calculate the average receivables collection period and compare this to the prior year and
investigate any significant differences.
 Inspect post year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
 Obtain a breakdown of the allowance for trade receivables, recalculate and compare to any
potentially irrecoverable balances to assess if the allowance is adequate.
 Select a sample of goods despatched notes (GDN) immediately before and after the year end
and follow through to the receivables ledger to ensure they are recorded in the correct
accounting period
 Select a sample of year-end receivables balances and agree back to valid supporting
documentation of sales invoices, GDNs and sales orders to ensure existence.

(b) Substantive procedures for bank balances

 Obtain a bank confirmation letter from Jasmine Co’s bankers for all of its accounts.
 Agree all accounts listed on the bank confirmation letter to the company’s bank reconciliations
or the trial balance/general ledger to ensure completeness of bank balances.
 For the current account, obtain Jasmine Co’s bank reconciliation and cast to check the
additions to ensure arithmetical accuracy.
 Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.
 Agree the reconciliation’s balance per the cash book to the year-end cash book.
 Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank
statement and also to the paying-in book pre year end.
 Trace all unpresented cheques through to a pre year-end cash book and post year-end bank
statement. For any unusual amounts or significant delays, obtain explanations from
management.
 Examine any old unpresented cheques to assess whether they need to be written back
 Review the cash book and bank statements for any unusual items or large transfers around the
year end, as this could be evidence of window dressing.
 Examine the bank confirmation letter for details of any security provided by Jasmine Co, with
regards to the bank overdraft or any legal right of set-off as this may require disclosure.
 For the savings bank accounts, review any reconciling items on the year-end bank
reconciliations and agree to supporting documentation
 Review the financial statements to ensure that the disclosure of bank balances is complete and
accurate and classified appropriately between current assets and current liabilities

c) Going concern procedures

 Obtain the company’s cash flow forecast and review the cash inflows and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash. –
 Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.
 Evaluate management’s plans for future actions, including their contingency plans in relation to
ongoing financing and plans for generating revenue, and consider the feasibility of these plans.
 Review the company’s post year-end sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
 Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.
 Review any bank correspondence to assess the likelihood of the bank renewing the overdraft
facility.
 Review post year-end correspondence with suppliers to identify if any have threatened legal
action or any others have refused to supply goods.
 With the client’s permission, enquire of the lawyers of Jasmine Co as to the existence of any
litigation and if so, the likely outcome of any litigation.
 Perform audit tests in relation to subsequent events to identify any items which might indicate
or mitigate the risk of going concern not being appropriate.
 Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company
 Review post year-end management accounts to assess if in line with cash flow forecast.
 Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
 Consider whether the going concern basis is appropriate for the preparation of the financial
statements.
 Obtain a written representation confirming the directors’ view that Jasmine Co is a going
concern.
(d) Auditor’s report

As the outcome regarding the negotiations for the overdraft facility renewal will not be known at
the time of signing the auditor’s report, there is a material uncertainty which may cast significant
doubt on the company’s ability to continue as a going concern. The impact on the auditor’s report
depends on whether this uncertainty is deemed to be adequately disclosed in the financial
statements.

Disclosure adequate
If the disclosures are adequate, then the auditor’s report will need to include a material uncertainty
related to going concern section. The section will state that the audit opinion is not modified,
indicate that there is a material uncertainty and will cross reference to the disclosure note made by
management. It would be included after the opinion and basis for opinion paragraph.

Disclosure inadequate
If the disclosures made by management are not adequate, the audit opinion will need to be
modified as there is a material misstatement relating to inadequate disclosure. The failure to
adequately disclose is likely to be material but not pervasive due to the ongoing nature of the
negotiations and so a qualified opinion will be issued.

The opinion paragraph will state that ‘except for’ the failure to adequately disclose the uncertainty,
the financial statements give a true and fair view. The report will contain a basis for opinion
paragraph, subsequent to the opinion paragraph, explaining that a material uncertainty exists and
that the financial statements do not adequately disclose this matter.