The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of Truse Co, which operates as a high street retailer and has 15 shops.

All of the shops are owned by Truse Co and have always been included in the financial statements at cost less depreciation. The shops are depreciated over 50 years. However, you know from discussions with management that the company intends to include one of the shops, the flagship store, at a revalued amount rather than cost in the current accounting period. The revalued amount is expected to be materially above the carrying value of the shop. The valuation will be based on a management estimate.

Management has explained that the reason for the revaluation is because the flagship store is located in an area where property prices have risen much more quickly compared to other shop locations. They consider the flagship store to be significantly undervalued on the statement of financial position.

Management will not depreciate the revalued amount allocated to the flagship store's building because they maintain the building to a high standard.

QUESTION

The audit junior has been assigned to the audit of the bank and cash balances of Truse Co.

He has noted down the audit evidence he plans to obtain in respect of the bank and cash balances:

(1) Bank reconciliation carried out by the cashier
(2) Bank confirmation report from Truse Co's bank
(3) Verbal confirmation from the directors that the overdraft limit is to be increased
(4) Cash count carried out by the audit junior himself

What is the correct order of the Audit evidence mentioned above, starting with the most reliable first?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of Truse Co, which operates as a high street retailer and has 15 shops.

All of the shops are owned by Truse Co and have always been included in the financial statements at cost less depreciation. The shops are depreciated over 50 years. However, you know from discussions with management that the company intends to include one of the shops, the flagship store, at a revalued amount rather than cost in the current accounting period. The revalued amount is expected to be materially above the carrying value of the shop. The valuation will be based on a management estimate.

Management has explained that the reason for the revaluation is because the flagship store is located in an area where property prices have risen much more quickly compared to other shop locations. They consider the flagship store to be significantly undervalued on the statement of financial position.

Management will not depreciate the revalued amount allocated to the flagship store's building because they maintain the building to a high standard.

QUESTION

At the planning meeting, it was decided that an auditor's expert should be sought in relation to the valuation of Truse Co's properties as the company has not used an independent valuer.

ISA 620 Using the Work of an Auditor's Expert states that the nature, timing and extent of audit procedures to evaluate the work of the auditor's expert depend on the circumstances of the engagement.

Which of the following matters should the audit team NOT consider in determining the nature, timing and extent of these audit procedures?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of Truse Co, which operates as a high street retailer and has 15 shops.

All of the shops are owned by Truse Co and have always been included in the financial statements at cost less depreciation. The shops are depreciated over 50 years. However, you know from discussions with management that the company intends to include one of the shops, the flagship store, at a revalued amount rather than cost in the current accounting period. The revalued amount is expected to be materially above the carrying value of the shop. The valuation will be based on a management estimate.

Management has explained that the reason for the revaluation is because the flagship store is located in an area where property prices have risen much more quickly compared to other shop locations. They consider the flagship store to be significantly undervalued on the statement of financial position.

Management will not depreciate the revalued amount allocated to the flagship store's building because they maintain the building to a high standard.

QUESTION

Which of the following procedures will provide appropriate audit evidence in respect of the completeness of non-current assets?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of Truse Co, which operates as a high street retailer and has 15 shops.

All of the shops are owned by Truse Co and have always been included in the financial statements at cost less depreciation. The shops are depreciated over 50 years. However, you know from discussions with management that the company intends to include one of the shops, the flagship store, at a revalued amount rather than cost in the current accounting period. The revalued amount is expected to be materially above the carrying value of the shop. The valuation will be based on a management estimate.

Management has explained that the reason for the revaluation is because the flagship store is located in an area where property prices have risen much more quickly compared to other shop locations. They consider the flagship store to be significantly undervalued on the statement of financial position.

Management will not depreciate the revalued amount allocated to the flagship store's building because they maintain the building to a high standard.

QUESTION

Which of the following assertions are relevant to the audit of tangible non-current assets?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of WSD & Co, an audit firm. You are planning the audit of Truse Co, which operates as a high street retailer and has 15 shops.

All of the shops are owned by Truse Co and have always been included in the financial statements at cost less depreciation. The shops are depreciated over 50 years. However, you know from discussions with management that the company intends to include one of the shops, the flagship store, at a revalued amount rather than cost in the current accounting period. The revalued amount is expected to be materially above the carrying value of the shop. The valuation will be based on a management estimate.

Management has explained that the reason for the revaluation is because the flagship store is located in an area where property prices have risen much more quickly compared to other shop locations. They consider the flagship store to be significantly undervalued on the statement of financial position.

Management will not depreciate the revalued amount allocated to the flagship store's building because they maintain the building to a high standard.

QUESTION

In his notes for the audit planning meeting, the audit junior made several statements in relation to the valuation of the shops.

Which TWO of the below statements are correct?

The following scenario relates to questions 1–5.

Scenario

You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for the year ended 30 April 20X7.

Newthorpe's management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.

Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.

One of the company's factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.

You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.

On 17 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was decided that the managing director's salary should stop from that date, and that no redundancy or compensation payments should be made.

The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years' salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.

The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION

The dismissal of Newthorpe's managing director has alerted you to the possibility that the company may not have complied with employment regulations. You therefore need to determine the impact that such non-compliance may have on the audit.

ISA 250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements sets out the responsibilities of the auditor in relation to the entity’s compliance with laws and regulations.

Which of the following responsibilities is CORRECT regarding the responsibilities of Newthorpe's auditors in relation to compliance with employment regulations?

The following scenario relates to questions 1–5.

Scenario

You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for the year ended 30 April 20X7.

Newthorpe's management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.

Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.

One of the company's factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.

You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.

On 17 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was decided that the managing director's salary should stop from that date, and that no redundancy or compensation payments should be made.

The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years' salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.

The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION

Which of the following audit procedures is likely to provide the auditor with the MOST reliable audit evidence regarding the legal claim?

The following scenario relates to questions 1–5.

Scenario

You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for the year ended 30 April 20X7.

Newthorpe's management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.

Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.

One of the company's factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.

You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.

On 17 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was decided that the managing director's salary should stop from that date, and that no redundancy or compensation payments should be made.

The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years' salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.

The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION

Using the drop down lists, complete the sentence below to show the correct accounting treatment for the legal claim made by the managing director for unfair dismissal and the reason for this treatment.

The legal claim should _________________ because ________________ .

The following scenario relates to questions 1–5.

Scenario

You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for the year ended 30 April 20X7.

Newthorpe's management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.

Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.

One of the company's factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.

You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.

On 17 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was decided that the managing director's salary should stop from that date, and that no redundancy or compensation payments should be made.

The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years' salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.

The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION

Which of the audit procedures below is NOT appropriate in auditing the valuation assertion for Newthorpe's inventory?

The following scenario relates to questions 1–5.

Scenario

You are an audit manager, auditing the financial statements of Newthorpe Engineering Co, a listed company, for the year ended 30 April 20X7.

Newthorpe's management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.

Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.

One of the company's factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.

You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.

On 17 March 20X7, Newthorpe's managing director was dismissed for gross misconduct. It was decided that the managing director's salary should stop from that date, and that no redundancy or compensation payments should be made.

The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years' salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.

The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.

QUESTION

Which TWO of the following statements are true regarding the auditor's attendance at the inventory count?

The following scenario relates to questions 1–5.

Scenario

Your audit firm Cal & Co has just gained a new audit client, Tirrol Co, in a tender in which Cal & Co offered competitively low audit fees. You are the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 20X9 with a scheduled date to complete the audit of 15 August 20X9. The date now is 3 June 20X9.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce management and financial statements.

You are currently planning your audit approach for Tirrol Co. One option being considered is to rewrite Cal & Co's audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will need to take place while the system is live. You are aware that July is a major holiday period for Tirrol Co.

QUESTION

The audit junior has obtained the following extract of the aged inventory report:

What is the impact on the value of inventory if no adjustments are made to the carrying amounts above?

The following scenario relates to questions 1–5.

Scenario

Your audit firm Cal & Co has just gained a new audit client, Tirrol Co, in a tender in which Cal & Co offered competitively low audit fees. You are the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 20X9 with a scheduled date to complete the audit of 15 August 20X9. The date now is 3 June 20X9.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce management and financial statements.

You are currently planning your audit approach for Tirrol Co. One option being considered is to rewrite Cal & Co's audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will need to take place while the system is live. You are aware that July is a major holiday period for Tirrol Co.

QUESTION

Tirrol Co's internal audit department is going to assist with the statutory audit. The chief internal auditor will provide you with documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year's audit.

Which of the following is NOT a matter the audit team should consider in determining whether or not the internal auditor's work is adequate for the purposes of the audit?

The following scenario relates to questions 1–5.

Scenario

Your audit firm Cal & Co has just gained a new audit client, Tirrol Co, in a tender in which Cal & Co offered competitively low audit fees. You are the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 20X9 with a scheduled date to complete the audit of 15 August 20X9. The date now is 3 June 20X9.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce management and financial statements.

You are currently planning your audit approach for Tirrol Co. One option being considered is to rewrite Cal & Co's audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will need to take place while the system is live. You are aware that July is a major holiday period for Tirrol Co.

QUESTION

Which TWO of the following are benefits of using audit software in auditing the inventory of Tirrol Co?

The following scenario relates to questions 1–5.

Scenario

Your audit firm Cal & Co has just gained a new audit client, Tirrol Co, in a tender in which Cal & Co offered competitively low audit fees. You are the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 20X9 with a scheduled date to complete the audit of 15 August 20X9. The date now is 3 June 20X9.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce management and financial statements.

You are currently planning your audit approach for Tirrol Co. One option being considered is to rewrite Cal & Co's audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will need to take place while the system is live. You are aware that July is a major holiday period for Tirrol Co.

QUESTION

It has been decided that systematic sampling would be applied to the audit of Tirrol Co's inventory.

Which of the following sampling methods correctly describes systematic sampling?

The following scenario relates to questions 1–5.

Scenario

Your audit firm Cal & Co has just gained a new audit client, Tirrol Co, in a tender in which Cal & Co offered competitively low audit fees. You are the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 20X9 with a scheduled date to complete the audit of 15 August 20X9. The date now is 3 June 20X9.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce management and financial statements.

You are currently planning your audit approach for Tirrol Co. One option being considered is to rewrite Cal & Co's audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office) as part of inventory valuation testing. The testing will need to take place while the system is live. You are aware that July is a major holiday period for Tirrol Co.

QUESTION

The audit junior is concerned about various circumstances of the audit, which are likely to increase audit risk. He has written to you with some suggestions.

Which TWO of the following suggestions are valid?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of Wright & Co, a large accountancy firm with 30 offices.

It is January 20X6, and a new intake of graduates and apprentices has recently started work at the audit department after completing their first ACCA exams. Julie, one of the new recruits, has been allocated to the audit of Wilbur Co, your audit client, for the year ended 31 December 20X5. You are responsible for providing guidance to her and have asked her to assist in the audit of trade payables and cash at bank.

Trade payables

Julie has performed a reconciliation of key trade payables balances as follows and has concluded that no further work is required:

Notes

1. Agreed to GRN dated 31 December 20X5
2. Agreed to cheque posted in the cash book 30 December 20X5

Your follow-up work on this identifies that:

• The goods in transit received from supplier XX1 were recognised in inventory at 31 December 20X5
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January 20X6
• There is a nil balance on the purchase accruals account

Cash at bank

In order to gain assurance over the company's bank balance, you asked Julie to arrange for a bank confirmation letter to be sent to Wilbur Co's bank.

Julie has also prepared a bank reconciliation. This shows a significant number of lodgements which were recorded in the cash book on 31 December 20X5. You are concerned that the cash book may have been kept open to include remittances actually received after the year end.

QUESTION

Which of the following pieces of audit evidence would provide the most reliable audit evidence that the lodgements recorded on 31 December 20X5 do not relate to amounts received after the period end?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of Wright & Co, a large accountancy firm with 30 offices.

It is January 20X6, and a new intake of graduates and apprentices has recently started work at the audit department after completing their first ACCA exams. Julie, one of the new recruits, has been allocated to the audit of Wilbur Co, your audit client, for the year ended 31 December 20X5. You are responsible for providing guidance to her and have asked her to assist in the audit of trade payables and cash at bank.

Trade payables

Julie has performed a reconciliation of key trade payables balances as follows and has concluded that no further work is required:

Notes

1. Agreed to GRN dated 31 December 20X5
2. Agreed to cheque posted in the cash book 30 December 20X5

Your follow-up work on this identifies that:

• The goods in transit received from supplier XX1 were recognised in inventory at 31 December 20X5
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January 20X6
• There is a nil balance on the purchase accruals account

Cash at bank

In order to gain assurance over the company's bank balance, you asked Julie to arrange for a bank confirmation letter to be sent to Wilbur Co's bank.

Julie has also prepared a bank reconciliation. This shows a significant number of lodgements which were recorded in the cash book on 31 December 20X5. You are concerned that the cash book may have been kept open to include remittances actually received after the year end.

QUESTION

Which of the following summarises the steps Julie should take in preparing the bank confirmation letter you have requested?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of Wright & Co, a large accountancy firm with 30 offices.

It is January 20X6, and a new intake of graduates and apprentices has recently started work at the audit department after completing their first ACCA exams. Julie, one of the new recruits, has been allocated to the audit of Wilbur Co, your audit client, for the year ended 31 December 20X5. You are responsible for providing guidance to her and have asked her to assist in the audit of trade payables and cash at bank.

Trade payables

Julie has performed a reconciliation of key trade payables balances as follows and has concluded that no further work is required:

Notes

1. Agreed to GRN dated 31 December 20X5
2. Agreed to cheque posted in the cash book 30 December 20X5

Your follow-up work on this identifies that:

• The goods in transit received from supplier XX1 were recognised in inventory at 31 December 20X5
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January 20X6
• There is a nil balance on the purchase accruals account

Cash at bank

In order to gain assurance over the company's bank balance, you asked Julie to arrange for a bank confirmation letter to be sent to Wilbur Co's bank.

Julie has also prepared a bank reconciliation. This shows a significant number of lodgements which were recorded in the cash book on 31 December 20X5. You are concerned that the cash book may have been kept open to include remittances actually received after the year end.

QUESTION

What further evidence, if any, is required in relation to the balance due to XX3 to determine if trade payables is understated?

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of Wright & Co, a large accountancy firm with 30 offices.

It is January 20X6, and a new intake of graduates and apprentices has recently started work at the audit department after completing their first ACCA exams. Julie, one of the new recruits, has been allocated to the audit of Wilbur Co, your audit client, for the year ended 31 December 20X5. You are responsible for providing guidance to her and have asked her to assist in the audit of trade payables and cash at bank.

Trade payables

Julie has performed a reconciliation of key trade payables balances as follows and has concluded that no further work is required:

Notes

1. Agreed to GRN dated 31 December 20X5
2. Agreed to cheque posted in the cash book 30 December 20X5

Your follow-up work on this identifies that:

• The goods in transit received from supplier XX1 were recognised in inventory at 31 December 20X5
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January 20X6
• There is a nil balance on the purchase accruals account

Cash at bank

In order to gain assurance over the company's bank balance, you asked Julie to arrange for a bank confirmation letter to be sent to Wilbur Co's bank.

Julie has also prepared a bank reconciliation. This shows a significant number of lodgements which were recorded in the cash book on 31 December 20X5. You are concerned that the cash book may have been kept open to include remittances actually received after the year end.

QUESTION

Which of the in-transit items included in the supplier statement reconciliations indicate that there is a cut-off problem?

1. Cash in transit
2. Goods in transit

The following scenario relates to questions 1–5.

Scenario

You are the audit manager in the firm of Wright & Co, a large accountancy firm with 30 offices.

It is January 20X6, and a new intake of graduates and apprentices has recently started work at the audit department after completing their first ACCA exams. Julie, one of the new recruits, has been allocated to the audit of Wilbur Co, your audit client, for the year ended 31 December 20X5. You are responsible for providing guidance to her and have asked her to assist in the audit of trade payables and cash at bank.

Trade payables

Julie has performed a reconciliation of key trade payables balances as follows and has concluded that no further work is required:

Notes

1. Agreed to GRN dated 31 December 20X5
2. Agreed to cheque posted in the cash book 30 December 20X5

Your follow-up work on this identifies that:

• The goods in transit received from supplier XX1 were recognised in inventory at 31 December 20X5
• The cheque payment to supplier XX2 appeared on the bank statement on 2 January 20X6
• There is a nil balance on the purchase accruals account

Cash at bank

In order to gain assurance over the company's bank balance, you asked Julie to arrange for a bank confirmation letter to be sent to Wilbur Co's bank.

Julie has also prepared a bank reconciliation. This shows a significant number of lodgements which were recorded in the cash book on 31 December 20X5. You are concerned that the cash book may have been kept open to include remittances actually received after the year end.

QUESTION

Julie has approached you with the following query:

'I know that as auditors, we have to collect audit evidence in order to support our audit opinion. But how can we tell how much audit evidence we need to get?'

Which of the below factors influence the auditor's judgement regarding the sufficiency of the evidence obtained?

1. The materiality of the account
2. The size of the account
3. The source and quality of the evidence available
4. The amount of time allocated to the audit

The following scenario relates to questions 1–5.

Scenario

You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co (Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your audit assistant.

Trade receivables

Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade receivables at Lodestar. She selected the 10 largest balances, representing 85% of the sales ledger at year end, including 2 items that were individually material. Seven customers agreed the sales ledger balance, two replied noting discrepancies which she has followed up and one has not replied.

The audit working papers contain the following work in respect of the two balances with discrepancies.

Allowance for doubtful accounts

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of year-end sales ledger balance.

QUESTION

The audit junior has suggested the following tests could be carried out to test the allowance for doubtful accounts:

1. Review cash receipts after year end
2. Review an aged debt analysis of the sales ledger
3. Ask the credit controller what debts are considered to be doubtful
4. Review sales invoices relating to overdue accounts

Which of the following correctly ranks these tests in terms of their appropriateness to the VALUATION assertion (most appropriate being listed first)?

The following scenario relates to questions 1–5.

Scenario

You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co (Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your audit assistant.

Trade receivables

Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade receivables at Lodestar. She selected the 10 largest balances, representing 85% of the sales ledger at year end, including 2 items that were individually material. Seven customers agreed the sales ledger balance, two replied noting discrepancies which she has followed up and one has not replied.

The audit working papers contain the following work in respect of the two balances with discrepancies.

Allowance for doubtful accounts

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of year-end sales ledger balance.

QUESTION

Your audit assistant has heard that auditing accounting estimates can be problematic and has asked you to explain why this is the case.

Which of the following statements concerning auditing accounting estimates is INCORRECT?

The following scenario relates to questions 1–5.

Scenario

You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co (Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your audit assistant.

Trade receivables

Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade receivables at Lodestar. She selected the 10 largest balances, representing 85% of the sales ledger at year end, including 2 items that were individually material. Seven customers agreed the sales ledger balance, two replied noting discrepancies which she has followed up and one has not replied.

The audit working papers contain the following work in respect of the two balances with discrepancies.

Allowance for doubtful accounts

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of year-end sales ledger balance.

QUESTION

You are reviewing the work carried out on the disputed balances.

What is the misstatement arising from the above issues and the resultant impact on current assets?

The following scenario relates to questions 1–5.

Scenario

You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co (Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your audit assistant.

Trade receivables

Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade receivables at Lodestar. She selected the 10 largest balances, representing 85% of the sales ledger at year end, including 2 items that were individually material. Seven customers agreed the sales ledger balance, two replied noting discrepancies which she has followed up and one has not replied.

The audit working papers contain the following work in respect of the two balances with discrepancies.

Allowance for doubtful accounts

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of year-end sales ledger balance.

QUESTION

The audit assistant has identified further procedures to be carried out in respect of the customer who has not responded to the circularisation request as follows.

1. Send out a follow-up request.
2. Inspect the sales invoices in the customer account at year end.
3. Ask the credit controller whether the customer exists.
4. Reconcile cash receipts after date with pre year end invoices in the customer account.

Which of these procedures would provide audit evidence of the EXISTENCE of this receivable?

The following scenario relates to questions 1–5.

Scenario

You are an audit senior of Beacon & Co and are currently conducting the audit of Lodestar Co (Lodestar) for the year ended 30 September 20X1. You are reviewing the work of your audit assistant.

Trade receivables

Your audit assistant has carried out a direct confirmation (a receivables circularisation) on trade receivables at Lodestar. She selected the 10 largest balances, representing 85% of the sales ledger at year end, including 2 items that were individually material. Seven customers agreed the sales ledger balance, two replied noting discrepancies which she has followed up and one has not replied.

The audit working papers contain the following work in respect of the two balances with discrepancies.

Allowance for doubtful accounts

The company has an accounting policy of creating an allowance for doubtful accounts at 2% of year-end sales ledger balance.

QUESTION

You are analysing the sample selection with regard to the direct confirmation.

Which of the following statements in relation to the sample selection is TRUE?

The following scenario relates to questions 1–5.

Scenario

Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet sports such as tennis, squash and badminton. The company purchases equipment from a variety of different suppliers and then resells this online. Customers place their orders directly on the company website. The ordering/sales software automatically verifies the order details, customer address and credit card information prior to orders being verified and goods dispatched.

Once the order has been verified the system produces a pre-numbered picking note. The order is then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is scanned in to the system and a sequentially numbered invoice is automatically produced and sent to the customer.

You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.

As the sales system is highly automated the audit manager has decided that computer-assisted audit techniques (CAATs) should be used where possible in the audit of the sales account. You identified the key steps to be taken in planning the application of CAATs, as follows:

1. Define the types of transactions to be tested
2. Set the objective of the CAAT application
3. Define the procedures to be performed on the data
4. Determine the content and accessibility of the entity's files

The manager has also decided that test data would be used to test the input of details into the ordering system. You identified the following test data which could be used:

(i) Orders for unusually large quantities
(ii) Orders with fields left blank
(iii) Orders with invalid inventory codes
(iv) Orders with complete and valid details

In addition to the sales income generated from the sale of sports equipment Porthos earns a small amount of rental income by renting out surplus warehouse space to a local company. The rental agreement shows that the annual rent from 1 March 20X7 was $24,000, increased from $21,600 per annum.

QUESTION

You are using a proof in total calculation to assess the accuracy of the rental income.

Which of the following correctly shows the calculation which would be used?

The following scenario relates to questions 1–5.

Scenario

Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet sports such as tennis, squash and badminton. The company purchases equipment from a variety of different suppliers and then resells this online. Customers place their orders directly on the company website. The ordering/sales software automatically verifies the order details, customer address and credit card information prior to orders being verified and goods dispatched.

Once the order has been verified the system produces a pre-numbered picking note. The order is then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is scanned in to the system and a sequentially numbered invoice is automatically produced and sent to the customer.

You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.

As the sales system is highly automated the audit manager has decided that computer-assisted audit techniques (CAATs) should be used where possible in the audit of the sales account. You identified the key steps to be taken in planning the application of CAATs, as follows:

1. Define the types of transactions to be tested
2. Set the objective of the CAAT application
3. Define the procedures to be performed on the data
4. Determine the content and accessibility of the entity's files

The manager has also decided that test data would be used to test the input of details into the ordering system. You identified the following test data which could be used:

(i) Orders for unusually large quantities
(ii) Orders with fields left blank
(iii) Orders with invalid inventory codes
(iv) Orders with complete and valid details

In addition to the sales income generated from the sale of sports equipment Porthos earns a small amount of rental income by renting out surplus warehouse space to a local company. The rental agreement shows that the annual rent from 1 March 20X7 was $24,000, increased from $21,600 per annum.

QUESTION

As part of substantive audit procedures, you perform a sequence check on the sales invoice numbers issued by Porthos over the year.

What is the purpose of the sequence check you have performed on the sales invoice numbers?

The following scenario relates to questions 1–5.

Scenario

Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet sports such as tennis, squash and badminton. The company purchases equipment from a variety of different suppliers and then resells this online. Customers place their orders directly on the company website. The ordering/sales software automatically verifies the order details, customer address and credit card information prior to orders being verified and goods dispatched.

Once the order has been verified the system produces a pre-numbered picking note. The order is then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is scanned in to the system and a sequentially numbered invoice is automatically produced and sent to the customer.

You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.

As the sales system is highly automated the audit manager has decided that computer-assisted audit techniques (CAATs) should be used where possible in the audit of the sales account. You identified the key steps to be taken in planning the application of CAATs, as follows:

1. Define the types of transactions to be tested
2. Set the objective of the CAAT application
3. Define the procedures to be performed on the data
4. Determine the content and accessibility of the entity's files

The manager has also decided that test data would be used to test the input of details into the ordering system. You identified the following test data which could be used:

(i) Orders for unusually large quantities
(ii) Orders with fields left blank
(iii) Orders with invalid inventory codes
(iv) Orders with complete and valid details

In addition to the sales income generated from the sale of sports equipment Porthos earns a small amount of rental income by renting out surplus warehouse space to a local company. The rental agreement shows that the annual rent from 1 March 20X7 was $24,000, increased from $21,600 per annum.

QUESTION

Which of the following procedures would provide evidence that sales cut-off for Porthos has been applied correctly?

The following scenario relates to questions 1–5.

Scenario

Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet sports such as tennis, squash and badminton. The company purchases equipment from a variety of different suppliers and then resells this online. Customers place their orders directly on the company website. The ordering/sales software automatically verifies the order details, customer address and credit card information prior to orders being verified and goods dispatched.

Once the order has been verified the system produces a pre-numbered picking note. The order is then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is scanned in to the system and a sequentially numbered invoice is automatically produced and sent to the customer.

You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.

As the sales system is highly automated the audit manager has decided that computer-assisted audit techniques (CAATs) should be used where possible in the audit of the sales account. You identified the key steps to be taken in planning the application of CAATs, as follows:

1. Define the types of transactions to be tested
2. Set the objective of the CAAT application
3. Define the procedures to be performed on the data
4. Determine the content and accessibility of the entity's files

The manager has also decided that test data would be used to test the input of details into the ordering system. You identified the following test data which could be used:

(i) Orders for unusually large quantities
(ii) Orders with fields left blank
(iii) Orders with invalid inventory codes
(iv) Orders with complete and valid details

In addition to the sales income generated from the sale of sports equipment Porthos earns a small amount of rental income by renting out surplus warehouse space to a local company. The rental agreement shows that the annual rent from 1 March 20X7 was $24,000, increased from $21,600 per annum.

QUESTION

Which of the test data identified by the audit junior should be used to confirm the completeness and accuracy of input into the sales system?

The following scenario relates to questions 1–5.

Scenario

Porthos, a limited liability company, is a retailer of sports equipment, specialising in racquet sports such as tennis, squash and badminton. The company purchases equipment from a variety of different suppliers and then resells this online. Customers place their orders directly on the company website. The ordering/sales software automatically verifies the order details, customer address and credit card information prior to orders being verified and goods dispatched.

Once the order has been verified the system produces a pre-numbered picking note. The order is then picked in the warehouse and a goods dispatched note (GDN) is produced. A copy of this is scanned in to the system and a sequentially numbered invoice is automatically produced and sent to the customer.

You are the audit senior working on the audit of Porthos for the year ended 31 December 20X7.

As the sales system is highly automated the audit manager has decided that computer-assisted audit techniques (CAATs) should be used where possible in the audit of the sales account. You identified the key steps to be taken in planning the application of CAATs, as follows:

1. Define the types of transactions to be tested
2. Set the objective of the CAAT application
3. Define the procedures to be performed on the data
4. Determine the content and accessibility of the entity's files

The manager has also decided that test data would be used to test the input of details into the ordering system. You identified the following test data which could be used:

(i) Orders for unusually large quantities
(ii) Orders with fields left blank
(iii) Orders with invalid inventory codes
(iv) Orders with complete and valid details

In addition to the sales income generated from the sale of sports equipment Porthos earns a small amount of rental income by renting out surplus warehouse space to a local company. The rental agreement shows that the annual rent from 1 March 20X7 was $24,000, increased from $21,600 per annum.

QUESTION

Which of the following identifies the correct order in which the steps to be taken in planning the application of CAATs should be performed?