study question bank

96 Pages·2014·1.69 MB·English

December 2014–June 2015 Edition
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STUDYM QUESTION BANK
ACCA
Paper P7 | ADVANCED AUDIT AND
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ASSURANCE
(INTERNATIONAL)
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ACCA

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PAPER P7
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ADVANCED AUDIT AND ASSURANCE
(INTERNATIONAL)

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STUDY QUESTION BANK

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For Examination to June 2015

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Accountants and have been reproduced by kind permission.

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STUDY QUESTION BANK – ADVANCED AUDIT AND ASSURANCE (P7)
CONTENTS
Question Page Answer Marks Date worked

REGULATORY ENVIRONMENT

1 Audit committee (ACCA J98) 1 1001 20 E

MONEY LAUNDERING

2 Money laundering (ACCA J05) 1 1003 15

CODES OF ETHICS FOR PROFESSIONAL ACCOUNTANTS L

3 Blake Seven (ACCA Pilot Paper 01) 1 1008 15
4 Depeche (ACCA J03) 2 1010 15
5 Clifden (ACCA J09) 3 1013 17
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PROFESSIONAL RESPONSIBILITY AND LIABILITY

6 CD Sales (ACCA D95) 3 1016 20
7 Duty of care 4 1018 15
8 Juliet (ACCA J10) 5 1020 20
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QUALITY CONTROL

9 Agnesal (ACCA D01) 6 1024 25

PROFESSIONAL APPOINTMENTS

10 Valda 7 1027 15
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11 Dragon Group (ACCA J09) 7 1029 32

PLANNING, MATERIALITY AND RISK

12 Papaya (ACCA D09) 9 1035 34
13 Azure (ACCA J02) 10 1040 25
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14 Hydrosports (ACCA D03) 12 1047 30
15 Harrier Motors (ACCA J04) 13 1052 25

AUDIT OF FINANCIAL STATEMENTS

16 Sharp 14 1055 17
17 IAS 24 examples 15 1057 20
18 Phoenix (ACCA Pilot Paper 01) 16 1059 20
19 Stilson (ACCA J01) 16 1063 20
20 Vema (ACCA D03) 17 1066 20
21 Eagle Energy (ACCA J04) 18 1070 20

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ADVANCED AUDIT AND ASSURANCE (P7) – STUDY QUESTION BANK
Question Page Answer Marks Date worked

GROUP AUDITS

22 Butch 19 1072 25
23 Cuckoo Group (ACCA J94) 20 1075 25
24 Beeston Industries (ACCA D86) 21 1078 25 E
25 Grissom (ACCA J10) 21 1082 36

NON-AUDIT ASSIGNMENTS

26 Flashmark 23 1087 20
27 Bellatrix (ACCA Pilot Paper 01) 23 1090L 25
28 Imperiol (ACCA D02) 24 1094 25
29 Internal audit services 26 1099 20

AUDITOR’S REPORTS
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30 Theta 26 1101 16
31 Libra & Leo (ACCA Pilot Paper 01) 27 1103 15
32 Scheel (ACCA J02) 28 1106 15
33 Kite Associates 28 1108 15
34 Hegas Co (ACCA J05) 29 1110 15
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REPORTS TO MANAGEMENT

35 Effective management letter 30 1112 15

CURRENT ISSUES AND DEVELOPMENTS

36 Merging practices (ACCA D98) 30 1114 16
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37 International liability (ACCA D97) 30 1116 20
38 Environmental issues (ACCA Pilot Paper 01) 31 1118 15
39 Web-based business reporting (ACCA J01) 31 1120 15
40 E-commerce (ACCA J02) 31 1122 15
41 Corporate governance standards (ACCA D02) 31 1127 15
42 Audit failures (ACCA J03) 32 1130 15
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43 ISA 240 (ACCA J04) 32 1133 15

FURTHER PRACTICE QUESTIONS

44 Johnston (ACCA J06) – Auditor’s reports 32 1135 15
45 Bill (ACCA J11) – Case study 33 1138 37
46 Butler (ACCA J11) – Going concern review 36 1143 27
47 Jacob (ACCA J11) – Due diligence review 39 1146 18
48 Willow (ACCA D11) – Audit completion 40 1149 25

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STUDY QUESTION BANK – ADVANCED AUDIT AND ASSURANCE (P7)

Question 1 AUDIT COMMITTEE
The objective of a system of corporate governance is to secure the effective, sound and efficient
operation of companies. This objective transcends any legislation or voluntary code. Good corporate
governance embraces not only making the company prosper but also doing business in a legal and
ethical manner. A key element of corporate governance is the audit committee. In many countries the
audit committee is a committee of a single board of directors and is of a voluntary nature regulaEted by
voluntary codes. In other countries there are committees which are of a supervisory nature and these
are regulated by statute. For example in Germany all large public companies must have a supervisory
board which contains non-executive directors who elect the board.
Required:
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(a) Explain how an audit committee could improve the effectiveness of the external
auditor’s work. (10 marks)
(b) Discuss the problems of ensuring the “independence” of the members of the audit
committee where the membership is regulated by a vPoluntary code of practice. (5 marks)
(c) Discuss the view that the role of the audit committee should not be left to voluntary
codes of practice but should be regulated by the law in all countries. (5 marks)
(20 marks)
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Question 2 MONEY LAUNDERING
(a) Explain the term “money laundering”. (3 marks)
(b) Comment on the need for ethical guidance for accountants on money laundering.
(4 marks)
(c) The Financial AAction Task Force on Money Laundering (FATF) recommends preventative
measures to be taken by independent legal professionals and accountants (including sole
practitioners, partners and employed professionals within professional firms).
Required:
SDescribe FOUR measures that assist in preventing professional accountants from being
used for money laundering purposes. (8 marks)
(15 marks)
Question 3 BLAKE SEVEN
(a) Explain the importance of the role of confidentiality to the auditor-client relationship.
(5 marks)
(b) Your firm acts as auditor and adviser to Blake Seven, a private limited company, and to its
four directors. The company is owned 50% by Brad Capella, 25% by his wife Minerva and
10% by Janus Trebbiano. Brad is the chief executive and Janus the finance director. Janus’s
sister, Rosella Trebbiano, has recently resigned from the executive board, following a
disagreement with the Capellas. Rosella has now formed her own company, Blakes Heaven,
in competition with Blake Seven.
Rosella is currently negotiating with her former co-executives the profit-related remuneration
due to her and the sale of her 15% holding of shares in Blake Seven to one or all of them.
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ADVANCED AUDIT AND ASSURANCE (P7) – STUDY QUESTION BANK
Rosella has contacted you to find out Brad’s current remuneration package since he refuses to
disclose this to her. She has also requested that your firm should continue to act as her
personal adviser and become auditor and adviser to Blakes Heaven.
Required:
Comment on the matters that you should consider in deciding whether or not yourE audit
firm can comply with Rosella’s requests. (10 marks)
(15 marks)
Question 4 DEPECHE
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You are a manager in Depeche, a firm of Chartered Certified Accountants. You have specific
responsibility for undertaking annual reviews of existing clients and advising whether an engagement
can be properly continued. The following matters arose in connection with the audit of Duran, a listed
company, for the year to 31 December 2013:
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(1) The audit team included a manager, two supervisors, two qualified seniors and six trainees.
The final audit, which lasted approximately five weeks, was very time-pressured and the team
worked late into the night towards the end of the audit. Duran’s staff were very supportive
throughout and paid for evening meals that were brought in so that the audit team could work
with minimum disruption.
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(2) Duran’s chief finance officer, Frankie Sharkey, was so impressed with the commitment of the
audit staff that he asked that Depeche pay them all a bonus through an increase in the audit
fee. In April 2014, Depeche paid all the members of the team below manager status a bonus
amounting to a week’s salary. The bonus was processed through Depeche’s payroll, in the
same way as overtime payments, and recharged to Duran as part of audit expenses.
(3) One of the points initially drafted for possible inclusion in the report to the company’s audit
committee concAerned the illegal dumping of drums, containing used machine oil, on nearby
wasteland. Notes of discussions between the audit manager and Frankie show that it is the
company’s unwritten policy to disregard the local environmental regulations and risk
incurring the fines, which are only small, as it would be costly to use the nearest licensed
disposal unit. The matter is not referred to in the final report.
RequireSd:
(a) Comment on the ethical and other professional issues raised by each of the above
matters. (10 marks)
(b) Discuss the appropriateness of available safeguards and advise whether or not Depeche
should continue as the auditor to Duran. (5 marks)
(15 marks)
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STUDY QUESTION BANK – ADVANCED AUDIT AND ASSURANCE (P7)

Question 5 CLIFDEN
(a) IFAC’s Code of Ethics for Professional Accountants states that a professional accountant is
required to comply with five fundamental principles, one of which is the principle of
“professional competence and due care”.
Required: E
Explain what is meant by the term “professional competence and due care”, and outline
how firms of Chartered Certified Accountants can ensure that the principle is complied
with. (4 marks)
(b) You are a senior manager in Clifden & Co, and you are responsible foLr the audit of Headford
Co, a manufacturer of plastic toys which are exported all over the world. The following
matter has been brought to your attention by the audit senior, who has just completed the
planning of the forthcoming audit for the year ending 30 June 2014:
During a discussion with the production manager, it wPas revealed that there have been some
quality control problems with the toys manufactured between March and May 2014. It was
discovered that some of the plastic used in the manufacture of the company’s products had
been contaminated with a dangerous chemical which has the potential to explode if it is
exposed to high temperatures. Headford did not recall any of the products which had been
manufactured during that time from customers, as management felt that the risk of any injury
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Your firm has been invited to tender for the provision of the external audit service to Cong
Co. You are aware that Cong operates in the same industry as Headford and that the two
companies often enter into highly publicised, aggressive advertising campaigns featuring very
similar products. Cong is a much larger company than Headford and there would be the
opportunity to offer some non-audit services as well as the external audit.
Required: A
Assess the ethical and professional issues raised, and recommend any actions necessary
in respect of:
(i) the contaminated plastic used by Headford Co; and (8 marks)
S(ii) the invitation to audit Cong Co. (5 marks)
(17 marks)
Question 6 CD SALES
CD Sales was a growth orientated company that was dominated by its managing director, Mr A Long.
The company sold quality music systems direct to the public. A large number of sales persons were
employed on a commission only basis. The music systems were sent to the sales agents who then sold
them direct to the public using telephone sales techniques. The music systems were supplied to the
sales agents on a sale or return basis and CD Sales recognised the sale of the equipment when it was
received by the sales agents. Any returns of the music systems were treated as re-purchases in the
period concerned.
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ADVANCED AUDIT AND ASSURANCE (P7) – STUDY QUESTION BANK
The company enjoyed a tremendous growth record. The main reasons for this apparent expansion were
as follows:
(i) Mr A Long falsified the sales records. He created several fictitious sales agents who were
responsible for 25% of the company’s revenue.
(ii) At the year end, Mr Long despatched almost this entire inventory of music systemsE to the
sales agents and re-purchased those that they wished to return after the year end.
(iii) Twenty per cent of the cost of sales was capitalised. This was achieved by the falsification of
purchase invoices with the co-operation of the supplier company. Suppliers furnished the
company with invoices for long term assets but supplied music systems.
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(iv) The directors of the company enjoyed a bonus plan linked to reported profits. Executives
could earn bonuses ranging from 50% to 75% of their basic salaries. The directors did not
query the unusually rapid growth of the company, and were unaware of the fraud perpetrated
by Mr A Long.
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Mr A Long spent large sums of money in creating false records and bribing accomplices in order to
conceal the fraud from the auditors. He insisted that the auditor should sign a “confidentiality”
agreement which effectively precluded the auditors from corroborating sales with independent third
parties, and from examining the service contracts of the directors. This agreement had the effect of
preventing the auditor from discussing the affairs of the company with the sales agents.
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The fraud was discovered when a disgruntled director wrote an anonymous letter to the Stock Exchange
concerning the reasons for CD Sales’ growth. The auditors were subsequently sued by a major bank
that had granted a loan to CD Sales on the basis of interim accounts. These accounts had been
reviewed by the auditor and a review report issued.
Required:
(a) Explain the keAy audit tests which would normally ensure that such a fraud as that
perpetrated by Mr A Long would be detected. (7 marks)
(b) Discuss the implications of the signing of the “confidentiality” agreement by the auditor.
(4 marks)
(c) SExplain how the “review report” issued by the auditor on the interim financial
statements differs in terms of its level of assurance from the auditor’s report on the
year-end financial statements. (4 marks)
(d) Discuss whether you feel that the auditor is guilty of professional negligence in not
detecting the fraud. (5 marks)
(20 marks)
Question 7 DUTY OF CARE
“It is not possible for any single principle to provide a practical test for determining whether a duty of
care is owed by the maker of a statement to those who may suffer economic loss through their reliance
on it.
“Nevertheless, when accounts are defective, and have been given an unqualified auditor’s report, a
sizeable proportion of the business community considers that those who lose money because of the
auditors’ negligence should be recompensed.”
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