Certificate in Accounting and Finance Stage Examination

24 April 2024
60 minutes – 36 marks
Additional reading time – None

CAF 8 – AUDIT AND ASSURANCE

Test – 3
Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.
(iii) Attempt each part of the question on fresh page.

Q. 1 Identify the situations in which an auditor may modify his report without affecting his opinion. Also explain
where such a modification should be placed in the audit report. (07)

Q. 2 The outcome of an uncertainty depends on future actions or events not under the direct control of the entity
but it may have a material effect on the financial statements. Discuss the impact of an uncertainty on the
auditor’s report. (03)

Q. 3 Briefly discuss the circumstances which may result in following types of opinions:
(a) Qualified opinion (02)
(b) Disclaimer of opinion (02)
(c) Adverse opinion (02)
(d) Emphasis of matter paragraph (02)

Q. 4 State the effect on your audit report of the following situation:

JonArc & Co were appointed auditors after the end of the financial year of Galartha Co. Consequently, the
auditors could not attend the year end inventory count. Inventory is material to the financial statements.
(02)

Q. 5 You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of three
audit clients.

Palm Industries Co (Palm)

Palm's year end was 31 March 2015 and the draft financial statements show revenue of $28.2 million,
receivables of $5.6 million and profit before tax of $4.8 million. The fieldwork stage for this audit has been
completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted
that no amounts had been paid to Palm from this customer as they were disputing the quality of certain
goods received from Palm. The finance director is confident the issue will be resolved and no allowance for
receivables was made with regards to this balance.
 Audit & Assurance Page 2 of 2

Ash Trading Co (Ash)

Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed
auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The
fieldwork stage for this audit is currently ongoing.

The inventory count at Ash's warehouse was undertaken on 31 January 2015 and was overseen by the
company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count.
Detailed inventory records were maintained but it was not possible to undertake another full inventory
count subsequent to the year end.
The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and
inventory of $510,000.

Bullfinch.com (Bullfinch)
Bullfmch.com is a website design company whose year-end was 31 October 2015. The audit is almost
complete and the financial statements are due to be signed shortly. Revenue for the year is $11.2 million and
profit before tax is $3.8 million. A key customer, with a receivables balance at the year end of $283,000, has
just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any
payments for the foreseeable future. The finance director has notified the auditor that he will write this
balance off as an irrecoverable debt in the 2016 financial statements.

Required:
For each of the issues:
(i) Discuss the issue, including an assessment of whether it is material; (06)
(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and (03)
(iii) Describe the impact on the audit report if the issue remains UNRESOLVED. (04)

Q. 6 During the year ended 31 August 20X2 Worboys Ltd, an outdoor leisure retailing chain, switched purchases
of tents and waterproof clothing from Leakproof Products Ltd to another supplier. Two months later.
Leakproof Products Ltd went into liquidation.

The liquidators of the company have issued a claim against Worboys Ltd for breach of implied contract and
consequential losses. No amount has yet been put on the claim, but lawyers advise that it could be
substantial and, although they are confident of a successful defence, also advise that the case could go
against Worboys Ltd. This would have a serious effect on the company.

Describe the effects this situation will have on the audit report of Worboys Ltd if the matter is
(i) fully disclosed in the financial statements
(ii) Not disclosed in the financial statements. (03)

(THE END)