The following scenario relates to questions 1–5
You are an audit senior of Viola & Co and are currently conducting the audit of Poppy Co for the year ended 30 June 20X6.
Materiality has been set at $50,000, and you are carrying out the detailed substantive testing on the year-end payables balance. The audit manager has emphasised that understatement of the trade payables balance is a significant audit risk.
Below is an extract from the list of supplier statements as at 30 June 20X6 held by the company and corresponding payables ledger balances at the same date along with some commentary on the noted differences:
The difference in the balance is due to an invoice which is under dispute due to faulty goods which were returned on 29 June 20X6.
The difference in the balance is due to the supplier statement showing an invoice dated 28 June 20X6 for $70,000 which was not recorded in the financial statements until after the year end. The payables clerk has advised the audit team that the invoice was not received until 2 July 20X6.
The audit manager has asked you to review the full list of trade payables and select balances on which supplier statement reconciliations will be performed.
Which of the following items should you select for testing?
(1) Suppliers with material balances at the year end
(2) Suppliers which have a high volume of business with Poppy Co
(3) Major suppliers with nil balances at the year end
(4) Major suppliers where the statement agrees to the ledger
B.1, 2 and 3 only
C.2 and 4 only
D.1, 2, 3 and 4
Which of the following audit procedures should be performed in relation to the balance with Lily Co to determine if the payables balance is understated?
A.Inspect the goods received note to determine when the goods were received
B.Inspect the purchase order to confirm it is dated before the year end
C.Review the post year-end cashbook for evidence of payment of the invoice
D.Send a confirmation request to Lily Co to confirm the outstanding balance
Which of the following audit procedures should be carried out to confirm the balance owing to Carnation Co?
(1) Review post year-end credit notes for evidence of acceptance of return
(2) Inspect pre year-end goods returned note in respect of the items sent back to the supplier
(3) Inspect post year-end cash book for evidence that the amount has been settled
A.1, 2 and 3
B.1 and 3 only
C.1 and 2 only
D.2 and 3 only
The audit manager has asked you to review the results of some statistical sampling testing, which resulted in 20% of the payables balance being tested.
The testing results indicate that there is a $45,000 error in the sample: $20,000 which is due to invoices not being recorded in the correct period as a result of weak controls and additionally there is a one-off error of $25,000 which was made by a temporary clerk.
What would be an appropriate course of action on the basis of these results?
A.The error is immaterial and therefore no further work is required
B.The effect of the control error should be projected across the whole population
C.Poppy Co should be asked to adjust the payables figure by $45,000
D.A different sample should be selected as these results are not reflective of the population
To help improve audit efficiency, Viola & Co is considering introducing the use of computer assisted audit techniques (CAATs) for some audits. You have been asked to consider how CAATs could be used during the audit of Poppy Co.
Which of the following is an example of using test data for trade payables testing?
A.Selecting a sample of supplier balances for testing using monetary unit sampling
B.Recalculating the ageing of trade payables to identify balances which may be in dispute
C.Calculation of trade payables days to use in analytical procedures
D.Inputting dummy purchase invoices into the client system to see if processed correctly
The following scenario relates to questions 6–10
You are an audit manager at Blenkin & Co and are approaching the end of the audit of Sampson Co, which is a large listed retailer. The draft financial statements currently show a profit before tax of $6·5m and revenue of $66m for the financial year ended 30 June 20X6. You have been informed that the finance director left Sampson Co on 31 May 20X6.
As part of the subsequent events audit procedures, you reviewed post year-end board meeting minutes and discovered that a legal case for unfair dismissal has been brought against Sampson Co by the finance director. During a discussion with the Human Resources (HR) director of Sampson Co, you established that the company received notice of the proposed legal claim on 10 July 20X6.
The HR director told you that Sampson Co’s lawyers believe that the finance director’s claim is likely to be successful, but estimate that $150,000 is the maximum amount of compensation which would be paid. However, management does not intend to make any adjustments or disclosures in the financial statements.
Blenkin & Co has a responsibility to perform. procedures to obtain sufficient, appropriate evidence that subsequent events are appropriately reflected in the financial statements of Sampson Co.
Subsequent events procedures should be performed between the date of the financial statements and WHICH DATE?
A.The date the subsequent events review is performed
B.The date of approval of the financial statements
C.The date of the auditor’s report
D.The date the financial statements are issued
If, after the financial statements have been issued, Blenkin & Co becomes aware of a fact which may have caused its report to be amended, the firm should consider several possible actions.
Which of the following are appropriate actions for Blenkin & Co to take?
(1) Discuss the matter with management and, where appropriate, those charged with governance
(2) Obtain a written representation from management
(3) Consider whether the firm should resign from the engagement
(4) Enquire how management intends to address the matter in the financial statements where appropriate
A.1 and 2
B.1 and 4
C.2 and 3
D.3 and 4
Which of the following audit procedures should be performed to form. a conclusion as to whether the financial statements require amendment in relation to the unfair dismissal claim?
(1) Inspect relevant correspondence with Sampson Co’s lawyers
(2) Write to the finance director to confirm the claim and level of damages
(3) Review the post year-end cash book for evidence of payments to the finance director
(4) Request that management confirm their views in a written representation
A.1, 2 and 3
B.1, 2 and 4
C.1, 3 and 4
D.2, 3 and 4
You are drafting the auditor’s report for Sampson Co and the audit engagement partner has reminded you that the report will need to reflect the requirements of ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.
According to ISA 701, which of the following should be included in the ‘Key Audit Matters’ paragraph in the auditor’s report?
A.Matters which required significant auditor attention
B.Matters which result in a modification to the audit opinion
C.All matters which were communicated to those charged with governance
D.All matters which are considered to be material to the financial statements
Which of the following audit opinions will be issued if the unfair dismissal case is NOT adjusted for or disclosed within the financial statements?
A.A qualified audit opinion as the financial statements are materially misstated
B.A qualified audit opinion as the auditor is unable to obtain sufficient appropriate evidence
C.An unmodified opinion with an emphasis of matter paragraph
D.An unmodified audit opinion