PAST PAPER 2022

Ratios:

Ratio 20X5 20X4

Gross profit margin 27.18% 27.63%
Inventory holding period 135 days 117 days
Receivable days 85 days 65 days
Payable days 39 days 64 days

Eight audit risks

Audit risks Auditor response
1. You are an audit supervisor with A skilled and senior auditor’s team should be
Bannock & Co and are responsible for allocated to the risky areas. And more audit
planning the audit of a new client. As procedure should be performed over the
this is a new client for him so auditor opening balances.
may have not enough knowledge about
the entity and the opening balances.
2. Esk Co purchased a patent for $2.6m Obtain the breakdown of the costs and match
which gives it the exclusive right to the cost allocated as capital expenditure to the
manufacture a waste disposal system cost allowed to be capitalised as per IAS-38 to
for a four-year period. There is a risk ensure the accuracy of capitalisation.
that the expenditures may not be
correctly classified such as admin cost Recalculate the value of the patent and
as the IAS 38 intangible assets. amortisation to ensure the arithmetical
3. There is a risk that it may be not accuracy.
amortised or amortised correctly.
Hence the asset and profit may be
overstated.
4. Esk Co obtained an interest-bearing Recalculate the liabilities in perspective of
bank loan of $2.5m during the year. current and non-current to ensure the
There is a risk that liability may not be arithmetical accuracy.
allocated correctly in between current
and non-current liabilities.
5. The payables ledger clerk has recently Auditor should have to do a detail testing on
discovered a batch of supplier invoices invoices and payable accounts and also review a
that had been miss-coded and supplier statement reconciliation to ensure all
therefore had not been recorded as payables or liabilities are recorded.
trade payables. There is a risk that there
may be other invoices might not be
identified at the year-end hence the
payables and purchases will be
understated.
6. An inventory count immediately Inspect the inventory count to identify any
following the fire identified that damage or slow moving inventory in warehouse
inventory costing $1.1m required to be and discuss with management the basis of its
 fully written off. And since there is valuation.
replacement order for the inventory.
While from the data of FS there is
increase in inventory since last year
from 6.4m to 8.3m. We have seen a
huge increase in inventory days from
117 to 135. There is a risk that damage
has not been recorded in full and the
hence inventory is high or there may be
a slow moving inventory which is not
separated hence there is an
overstatement in inventory side.
7. The directors have raised a claim Discuss with management whether there is any
against Esk Co.’s insurance company to notification of payment is received from the
cover the full extent of the lost insurance company, if so then review the
inventory. Although no confirmation correspondence.
has been received from the insurance
company. The claims should only be
recognised if its chance is virtually
certain but as there is no confirmations
from the insurance company hence the
recognition will overstate profit and
receivables.
8. Esk Co has not been monitoring the Review aged receivable ledger and post year
ageing of its receivables and only end cash receipts to confirm the valuation and
follows up on outstanding invoices also consider the adequacy of allowance for
when the system alerts credit control receivables.
that a customer invoice has been
outstanding for 90 days or more. The
standard credit terms are 30 days. As
the manager is out of work and
inexperience manager is leading the
work. We have seen that the receivable
days has been increased from 65 to 85
days since last year. There is risk that
amount may not be recovered and
receivable are overstated.
9. Tax consultant who has advised that The auditor should review a letter from the tax
there does appear to have been a authorities and discuss the matter with
breach of tax legislation and has management.
estimated that a fine and penalty
totalling $0.6m will be payable. And
management are not willing to record it
in FS. Which results in misstatement in
financial statement as there is
understatement of provision and
inadequate disclosure.
10. Esk Co obtained an interest-bearing Review the notes the FS to ensure that the
bank loan of $2.5m during the year. disclosure for the bank loan has been disclosed
There is risk that the bank loan may not correctly and adequately.
be adequately disclosed in notes to the
 financial statement.

Describe FOUR matters the auditor may consider in determining whether a

deficiency in internal control is significant:
1. The amount expose to frauds.
2. The susceptibility of fraud or loss related to assets or liability
3. The importance of deficiency control to the financial reporting process.
4. The subjectivity and complexity of determining the estimated amount.
5. The deficiency resulting in material misstatement in FS in future.
6. The interaction of deficiency with the other deficiencies in internal control.

Three direct controls and Test of controls on the direct controls :

On sales system.

Direct controls Test of controls

1. The automated system generates a Review a sample of new customer credit
credit limit for each new customer account limits to confirm that it is authorised by
which the sales director approves a sales director before order placement.
before the customer can place any
orders. She evidences her approval in
the system.
The sales director ensures if there is
any inconsistencies in automated credit
system is identified and analysed on
timely basis
2. The accounts clerk reconciles the Review a sample of reconciled documents such
receivables ledger control account to as RLCA and receivable ledger to ensure that it
the receivables ledger in order to verify is authorised by the financial controller and
the month end receivables balance. errors are addressed timely.
Any reconciling items are documented,
errors are corrected on a timely basis
and then the reconciliations are
reviewed and approved by the financial
controller. It is actually a good piece of
control as any inconsistencies will be
identified on timely basis.
3. Any debts which are greater than 30 Obtain a sample of aged receivable report and
days overdue are then passed to the confirm the evidence of review through a
credit control department which signature or stamp by the receivable ledger
contacts the customers to resolve any clerk.
issues and recover the debt. The timely
reviews of the accounts will reduce the
chances of irrecoverable debts. And
also the balances appropriateness will
be assured.
FIVE DEFICIENCIES in Whittaker Co’s PAYROLL and BANK systems and provide
a control recommendation
Deficiencies Recommendations
1. When additional staff are required at Payroll should not approve any hiring without
short notice, joiner’s forms are not filling a joiner form.
completed and instead, the production A joiner form should be filled by all employees
supervisor notifies the payroll whether permanent or temporary and payroll
department by email on the day they should sign the form as evidence being
commence employment. actioned.
The production supervisor may not
provide enough information hence it
may result in wrong payments leads to
loss of employees goodwill.
There is a chance of factitious
employees in this type of hiring leads to
loss for the company.
2. All overtime reports are reviewed on a The overtime report should be reviewed on
quarterly basis by the production monthly basis before the payment to address
supervisor after the overtime has been any inconsistencies on timely basis.
paid. The overtime report should be
reviewed timely basis in order to
identify the inconsistencies timely.
The check and balance of report after
being paid will not help in discovery of
any inconsistencies and will lead to
either loss for company or loss of
employee’s goodwill.
3. The standing data is reviewed regularly The payroll calculation and recalculation check
to ensure it is still accurate however no & balance should be done on regularly basis to
checks are performed on the monthly identify misstatements on timely basis and
payroll calculations. If the data of should be evidenced the review through a
payroll is not regularly reviewed will signature by a responsible party.
lead to misstatements in calculations
not being identified and will cause loss
for the company.
4. The bonuses for 20X5 were input into Bonuses for the employee’s should be set by a
the payroll system by the payroll clerk. responsible party like directors.
As clerk is inexperience regarding the
bonuses input, who will introduce
wrong bonuses to payroll system will
lead to loss for the company or loss of
employee’s goodwill.
5. The login details including the The access of passwords and passcodes should
password and the passcode are saved be limited to the responsible parties with
in a shared file which is accessible to all proper authority. Also there should be a regular
payables ledger staff in the accounts changes in passwords to ensure strong security.
department. It opens a route for a And the changes to the payables ledger should
fraud as a very sensitive data is open to be reviewed and authorised by finance director
all payable ledger staff hence they can to ensure that change to be done.
set fraudulent payables and withdraw
money through bank which leads to a
huge loss for the company.