ICAN NOVEMBER 2024 MOCK EXAMINATIONS

ADVANCED AUDIT & ASSURANCE

FIRST CHOICE ACCURATE SUCCESS LINK LTD

 FIRST CHOICE ACCURATE (FCA) SUCCESS LINK INC.
PROFESSIONAL LEVEL MOCK EXAMINATION – NOVEMBER 2024

ADVANCED AUDIT & ASSURANCE

Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN

THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

Question 1
Blackmart Plc is one of your listed audit clients which offers property management, property
financing and mortgage services to its clients. During the audit of the company, the following
matters came to your attention:

• Grace Sadiku, one of the audit team members has provisionally agreed to take out a
mortgage facility with a duration of 10 years using the facility of Blackmart Plc to finance her
first residential property. In the area where the property is located, the first residential
property gets full tax waiver on the entire installments paid within the first 5 years which is
usually a significant tax incentive. The mortgage facility would be secured by the property
and it has been defined as the best offer available in the market;

• Also, during the period, the Human Resources (HR) Manager of Blackmart Plc resigned, and
the company had reached out to your firm to provide a staff on secondment till a
substantive HR Manager is appointed;

• The management of Blackmart has also informed your audit team that the company
maintains only two bank accounts and there will be no need to circularise the banks as the
auditors can rely on the balances as generated from the bank‟s portal as at the end of the
year; and

• The audit committee has asked your firm to work with the internal audit team to design
internal controls over the part of the accounting system which deals with revenue, and also
evaluate the operating effectiveness of the internal controls.

Required: Prepare a memo to your Manager, commenting on the professional and ethical issues
arising from the audit of Blackmart Plc and also suggest to him/her on how to manage the
identified issues. (10 Marks)

b. During the audit year, on the review of the audit work done on Community Microfinance Bank (a
new significant audit client), you noted the following issues:

• At the audit strategy stage, it was agreed that the audit of loans and advances would involve
reliance on the effectiveness of internal controls. However, during the test of controls, it was
noted that five loans were not approved by the appropriate approving officers. Further

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 review indicated that the loans were genuinely issued to customers but were only approved
by officers whose approval limit have been exceeded;

• During the period under review, the tax authority carried out a tax investigation and noted
significant variance between the company‟s estimated tax liabilities and the tax authority‟s
position. From further discussion, it was noted that the previous tax computation was done
by a junior staff who does not have the requisite experience and the computations were not
duly reviewed by experienced senior officers of the company;

• The company deployed a new loan disbursement software which is linked to the financial
reporting software. From your review of the new software, the initiator of a transaction
could approve the same transaction as long as he/she changes the designation to approving
authorities after initiation. You have flagged this as a possible control risk; and

• During your review of the receivables account, a variation was noted between the amount in
a customer‟s receivables balance in the ledger and the client confirmation. However, the
variance was considered not material and not adjusted for. During discussion with the
Receivables Manager, it came to your attention that the client in focus is a family member of
the Managing Director.

The team is considering the impact of the above observations on the audit.

Required:

(i) Draft a report to management evaluating the implications of the above

observations on the control environment and the audit strategy/procedures. (10
Marks)

(ii) Comment on whether the issues are to be reported to those charged with
governance of the entity. (10 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION (40 MARKS)

Question 2
You are a manager in Ingot & Co, a firm of Chartered Certified Accountants, with specific
responsibility for the quality of audits. Ingot was appointed auditor of Arsenal Co, a provider of
waste management services, in July 2006. You have just visited the audit team at Arsenal's head
office. The audit team is comprised of an accountant in charge (AIC), an audit senior and two
trainees.

Arsenal's draft accounts for the year ended 30 June 2006 show revenue of $11·6 million (2005 – $8·1
million) and total assets of $3·6 million (2005 – $2·5 million). During your visit, a review of the audit
working papers revealed the following:

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(a) "On the audit planning checklist, the audit senior has crossed through the analytical procedures
section and written ‘not applicable – new client’. The audit planning checklist has not been signed
off as having been reviewed. !

(b) "The AIC last visited Arsenal's office when the final audit commenced two weeks ago on 1
August. The senior has since completed the audit of tangible non-current assets (including property
and service equipment) which amount to $0·6 million as at 30 June 2006 (2005 – $0·6 million). The
AIC spends most of his time working from Ingot’s office and is currently allocated to three other
assignments as well as ARsernal's audit.

(c) "At 30 June 2006 trade receivables amounted to $2·1 million (2005 – $0·9 million). One of the
trainees has just finished sending out first requests for direct confirmation of customers’ balances as
at the balance sheet date.

(d) "The other trainee has been assigned to the audit of the consumable supplies that comprise
inventory amounting to $88,000 (2005 – $53,000). The trainee has carried out tests of controls over
the perpetual inventory records and confirmed the ‘roll-back’ of a sample of current quantities to
book quantities as at the year end.

Required:

Identify and comment on the implications of these findings for Ingot & Co’s quality control policies
and procedures.

Question 3
The Dragon Group is a large group of companies operating in the furniture retail trade. The group
has expanded rapidly in the last three years, by acquiring several subsidiaries each year. The
management of the parent company,

Dragon Co, a listed company, has decided to put the audit of the group and all subsidiaries out to
tender, as the current audit firm is not seeking re-election. The financial year end of the Dragon
Group is 30 September 2009.

You are a senior manager in Unicorn & Co, a global firm of Chartered Certified Accountants, with
offices in over 150 countries across the world. Unicorn & Co has been invited to tender for the
Dragon Group audit (including the audit of all subsidiaries). You manage a department within the
firm which specialises in the audit of retail companies, and you have been assigned the task of
drafting the tender document. You recently held a meeting with Edmund Jalousie, the group finance
director, in which you discussed the current group structure, recent acquisitions, and the group’s
plans for future expansion.

Group structure

The parent company owns 20 subsidiaries, all of which are wholly owned. Half of the subsidiaries are
located in the same country as the parent, and half overseas. Most of the foreign subsidiaries report

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under the same financial reporting framework as Dragon Co, but several prepare financial
statements using local accounting rules.

Required:

Recommend and describe the principal matters to be included in your firm’s tender document to
provide the audit service to the Dragon Group.

Question 4
The audit of Davis Co’s financial statements for the year ended 30 November 2017 is nearing
completion and the auditor’s report is due to be signed next week. Davis Co manufactures parts and
components for the aviation industry.

You are conducting an engagement quality control review on the audit of Davis Co which is a listed
entity and a significant new client of your firm. The draft financial statements recognise revenue of
$8·7 million, assets of $15·2 million and profit before tax of $1·8 million.

You have identified the following issues as a result of your review:

(i) The planned audit approach to trade payables was to place reliance on purchasing controls and
keep substantive tests to a minimum. During controls testing on trade payables, from a random
statistical sample, the audit team identified three purchase orders which had not been authorised by
the procurement manager. On review of the supporting documentation, the audit team concluded
that the items were legitimate business purchases and therefore concluded that no additional
procedures were required. (4 marks)

(ii) Following a review of petty cash transactions, the audit assistant identified that the petty cashier
paid for taxi fares for personal, non-business journeys with a total value of $175. Following
discussions with the audit assistant, you have ascertained that he did not report the matter further
as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother
and that he did not want to get him into trouble. (6 marks)

(iii) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2017, for
items sent to Chinn Co, with a combined sales value of $17,880 which had been included in revenue
for the year ended 30 November 2017. The client’s financial controller, David Mount, has explained
that Chinn Co does not order on a regular basis from Davis Co. In the absence of a regular payment
history with Chinn Co therefore, and in order to minimise the receivables collection period from this
particular customer, the sales invoice is raised and sent to the customer on the same day that the
sales order is received. The average time period between the receipt of an order and despatching
the goods to the customer is approximately one to two weeks. The audit working papers have
concluded that no further investigation is necessary. (6 marks)

(iv) The finance director, Leslie Gray, has not completed the tax computation for the year ended 30
November 2017. He has recently asked the audit assistant to calculate the company’s tax payable for
the year on the basis that as a recently qualified chartered certified accountant, the audit assistant
was more up to date with recent changes in tax legislation. (4 marks)

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Required:
Evaluate the quality control issues and the implications for the completion of the audit including
any further actions which should be taken by your audit firm. Your answer should include the
matters to be communicated to management and to those charged with governance in relation to
the audit of Davis Co.
Note: The split of the mark allocation is shown against each issue described above.

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION (30 MARKS)

Question 5
You are also responsible for providing direction to more junior members of the audit department of
your firm on technical matters. Several recent recruits have asked for guidance in the area of
auditor’s liability. They are keen to understand how an audit firm can reduce its exposure to claims
of negligence. They have also heard that in some countries, it is possible to restrict liability by
making a liability limitation agreement with an audit client.

Required:

(i) Explain FOUR methods that may be used by an audit firm to reduce exposure to litigation
claims;
(ii) Assess the potential implications for the profession, of audit firms signing a liability
limitation agreement with their audit clients.

Question 6
You are the partner responsible for the audit of Grimes Co, for the year ended 30 April 2010. The
final audit has been completed and you have asked the audit manager to draft the audit report. The
manager is aware that there is guidance for auditors relating to audit reports in ISA 706 Emphasis of
Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager
has asked for your assistance in this matter.

Required:

(i) Define an ‘Emphasis of Matter paragraph’ and explain, providing examples, the use of such a
paragraph; (7 marks)
(ii) Define an ‘Other Matter paragraph’ and explain, providing examples, the use of such a
paragraph.

Note: You are not required to produce draft paragraphs. (8 marks)

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Question 7
You are a manager in the audit department of Nidge & Co, a firm of Chartered Certified Accountants,
responsible for the audit of Darren Co, a new audit client operating in the construction industry.
Darren Co’s financial year ended on 31 January 2015, and the draft financial statements recognise
profit before tax of $22·5 million (2014 – $20 million) and total assets of $370 million, including cash
of $3 million. The company typically works on three construction contracts at a time.

The audit is nearly complete and you are reviewing the audit working papers. The audit senior has
brought several matters to your attention:

(a) Darren Co is working on a major contract relating to the construction of a bridge for Flyover Co.
Work started in July 2014, and it is estimated that the contract will be completed in September
2015. The contract price is $20 million, and it is estimated that a profit of $5 million will be made on
completion of the contract. The full amount of this profit has been included in the statement of
profit or loss for the year ended 31 January 2015.

Darren Co’s management believes that this accounting treatment is appropriate given that the
contract was signed during the financial year, and no problems have arisen in the work carried out
so far.
Required:
Discuss the implications of the matters described above on the completion of the audit and on the
auditor’s report, recommending any further actions which should be taken by the auditor.

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