In collaboration with Staffordshire University

Auditing and fraud risk management 1

MOCK exam
STUDENT COPY

Date: 06/12/2023 Module Code: ACCT60308

Time: 11:50 Weighting: Formative (0%)

Duration: Examiner: Maredi
2 hours plus 10 minutes reading time

Instructions to candidates
1) Do not turn over the exam paper until you are told to do so.
2) You have 120 minutes plus 10 minutes for reading for this exam, which is prepared to help
you prepare for your final assessment.

3) The exam consists of FOUR questions of 25 marks each.

4) Answer ALL questions.

5) The use of a non-programmable calculator is allowed.
6) Show all workings, where applicable, as marks will be awarded for workings and formulas
used.
7) This is a closed book exam. You are not permitted to use any additional material.
QUESTION 1
You are an audit manager in Sistaz&Co, a firm of Chartered Certified Accountants which offers a
range of assurance services. You are responsible for the audit of Bros Co, a company which
provides approximately 10% of your firm's practice income each year. The finance director of
Bros Co has recently contacted you to provide information about another company, Cousins Co,
which is looking to appoint a provider of assurance services. An extract from the email which the
finance director of Bros Co has sent to you is shown below:

'One of my friends, Gordon Potts, is the managing director of Cousins Co, a small
company which is looking to expand in the next few years. I know that Gordon has
approached the company's bank for finance of $6 million to fund the expansion. To
support this loan application, Gordon needs to appoint a firm to provide an audit on the
company's financial statements. He would also want the appointed firm to provide tax
planning advice and to prepare both the company's and his personal tax computations for
submission to the tax authorities. I have asked Gordon to contact you, and I hope that Sistaz & Co
will be able to provide these services to Cousins Co for a low fee. If the fee you suggest is too
high, and unacceptable to Gordon, then I will recommend that Gordon approaches E-Why
& Co instead, and I would also consider appointing E-Why & Co to provide the audit of Bros Co.'

E-Why & Co is a firm of Chartered Certified Accountants which has an office in the
same town as Sistaz & Co.

You have done some research on both Cousins Co and Gordon Potts and have confirmed that the
company is small enough to be exempt from audit. The company is owner-managed, with the
Potts family owning 90% of the share capital. Gordon Potts is a director and majority
shareholder of three other companies. An article in a newspaper from several years ago about
Gordon Potts indicated that one of his companies was once fined for breach of employment law
and that he had used money from one of the company's pension plans to set up a
business abroad, appointing his son as the managing director of that business.

REQUIRED:

a) Identify and explain the ethical issues and other matters which should be (20)
considered and recommend safeguards that can be put in place.
b) Explain the importance of obtaining customer due diligence and list the (5)
information which should be obtained.
TOTAL QUESTION 1 25

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QUESTION 2
Dep Co is a retailer of ladies clothing and accessories. It operates in many countries around the
world and has expanded steadily from its base in Vietnam. Its main market is aimed at 15 to 35
year olds and its prices are mid to low range. The company’s yearend was 30 September 2023.

In the past the company has bulk ordered its clothing and accessories twice a year. However, if
their goods failed to meet the key fashion trends then this resulted in significant inventory write
downs. As a result of this the company has recently introduced a just-in-time ordering system.

The fashion buyers make an assessment nine months in advance as to what the key trends are
likely to be, these goods are sourced from their suppliers but only limited numbers are initially
ordered.

Dep Co has an internal audit department but at present their only role is to perform regular
inventory counts at the stores.

Ordering process
Each country has a purchasing manager who decides on the initial inventory levels for each
store, this is not done in conjunction with store or sales managers. These quantities are
communicated to the central buying department at the head office in Vietnam.

An ordering clerk amalgamates all country orders by specified regions of countries, such as
Central Europe and North America, and passes them to the purchasing director to review and
authorise.

As the goods are sold, it is the store manager’s responsibility to re-order the goods through the
purchasing manager; they are prompted weekly to review inventory levels as although the goods
are just in time, it can still take up to four weeks for goods to be received in store.

It is not possible to order goods from other branches of stores as all ordering must be undertaken
through the purchasing manager. If a customer requests an item of clothing, which is unavailable
in a particular store, then the customer is provided with other branch telephone numbers or
recommended to try the company website.

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Goods received and Invoicing

To speed up the ordering to receipt of goods cycle, the goods are delivered directly from the
suppliers to the individual stores.

On receipt of goods the quantities received are checked by a sales assistant against the supplier’s
delivery note, and then the assistant produces a goods received note (GRN). This is done at quiet
times of the day so as to maximise sales. The checked GRNs are sent to head office for matching
with purchase invoices.

As purchase invoices are received, they are manually matched to GRNs from the stores, this can
be a very time consuming process as some suppliers may have delivered to over 500 stores.

Once the invoice has been agreed then it is sent to the purchasing director for authorisation. It is
at this stage that the invoice is entered onto the purchase ledger.

REQUIRED:

a) Explain what is meant by “control environment” and identify an example in the (5)
case above.
b) In respect of internal controls of Dep Co:
i. Identify and explain FIVE deficiencies; and (10)
ii. Recommend a control to address each of these deficiencies. (10)

TOTAL QUESTION 2 25

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QUESTION 3
HealthyYou hospital is located in a country where healthcare is free, as the taxpayers fund the
hospitals which are owned by the government.

HealthyYou has one centralised buying department and all purchase requisition forms for
medical supplies must be forwarded here. Upon receipt the buying team will research the lowest
price from suppliers and a purchase order is raised. This is then passed to the purchasing director,
who authorises all orders. The small buying team receive more than 200 forms a day.

The human resources department has had difficulties with recruiting suitably trained staff.
Overtime rates have been increased to incentivise permanent staff to fill staffing gaps, this has
been popular, and reliance on expensive temporary staff has been reduced. Monitoring of staff
hours had been difficult, but the hospital has implemented time card clocking in and out
procedures and these hours are used for overtime payments as well.

The hospital has invested heavily in new surgical equipment, which although very expensive, has
meant that more operations could be performed and patient recovery rates are faster. However,
currently there is a shortage of appropriately trained medical staff. A capital expenditure
committee has been established, made up of senior managers, and they plan and authorise any
significant capital expenditure items.

REQUIRED:

a) Identify a control activity that may be difficult to implement at HealthyYou and (3)
explain why.
b) Describe the audit procedures that you should perform in respect of the (10)
acquisition of property, plant and equipment during the year.
c) Describe the audit procedures that you should perform in respect of the (10)
valuation of the property, plant and equipment balance at year end.
d) List two other assertions that the property, plant and equipment balance can be (2)
tested for.
TOTAL QUESTION 3 25

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QUESTION 4
This question has two independent parts. You are required to answer both parts.
PART A
ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of
engagement letters and deals with the auditor’s responsibilities in agreeing the terms of the audit
engagement with management.
REQUIRED:

a) Describe FIVE considerations for the auditor prior to accepting an audit (10)
engagement.
b) Explain the purpose of an engagement letter. (4)
c) List SIX matters that should be included within an audit engagement letter. (6)
TOTAL PART A 20

PART B
ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in
planning an audit.

REQUIRED:

d) List FIVE main areas, other than audit risks, that should be included within an (5)
audit strategy document.
TOTAL PART B 5
TOTAL QUESTION 4 25
TOTAL QUESTION PAPER 100

END OF EXAM