UNIVERSITY OF BOLTON BUSINESS SCHOOL. BA (Hons) ACCOUNTANCY SEMESTER 2 EXAMINATIONS 2015/2016 AUDITING AND ASSURANCE MODULE NO: ACC5004

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1 BBS024 UNIVERSITY OF BOLTON BUSINESS SCHOOL BA (Hons) ACCOUNTANCY SEMESTER 2 EXAMINATIONS 2015/2016 AUDITING AND ASSURANCE MODULE NO: ACC5004 Date: Monday 16 th May 2016 Time: 10:00am to 1:00pm INSTRUCTIONS TO CANDIDATES: There are 5 questions on this paper. Answer any 4 questions. All questions carry equal marks. This is a closed book examination. You MUST hand in this examination paper with your examination script

2 Page 2 of 7 QUESTION 1 Your audit firm has recently been invited to accept the appointment as external auditors to Childs Limited, a company that owns and operates a number of manufacturing and sales sites for their electrical roadside tunnelling equipment throughout the UK. You have never previously acted for Childs Limited, but one of the partners in your practice has a sister who is married to the finance director of Childs Limited. Your audit firm has a total of three partners and 10 staff and operate from a single office in the Bolton area of the UK. The current auditors (Dodge and Bridge) of Childs Limited have received notice from the company s directors that they are not going to be re-appointed at the forthcoming AGM. The management has not given a reason for this course of action, although the partners at Dodge and Bridge suspect it is because they understand that the directors intend to sue them for negligence. In addition to this they are also concerned that the directors may not pay the remaining balance on their account for the previous year s audit. As part of the proposed appointment for your firm, the directors of Childs Limited have asked if you can assist them with the preparation of the financial statements for the current year end. a) Identify and explain five considerations that influence your firm s decision on whether or not to accept the appointment as external auditors of Childs Limited. (10 Marks) b) Outline the responsibilities and rights, including those under the UK Companies Acts, of the current auditors of Childs Limited in relation to the negligence claim and the unpaid fees. (4 Marks) c) Identify the respective duties of both the management and the external auditors of Childs Limited in relation to the provision of the proposed additional non audit services. (3 Marks) d) As the products are of a specialised nature, select four audit tests (with relevant financial statement assertions) which are relevant to the audit of Childs Limited inventory. (8 Marks)

3 Page 3 of 7 QUESTION 2 Part A Brian, Adil and Ste Limited operate a large shop in Bolton where they sell paintings. Usually customers will see their paintings on the internet and place an order at the shop which is delivered four weeks later in the company delivery van. The four weeks is required as each sale generates a purchase order with one of the company suppliers. Upon placing an order at the shop each customer pays by cash, cheque or credit card and on occasion a hire purchase agreement. There are four sales assistants, a van driver and a cashier in the shop, all the accounting and purchasing is performed by the manager and a part time book keeper. The three directors all have other businesses which take up a significant amount of their time and as a result only review the company operations once per month when they hold a directors meeting. Devise an internal control system for the shop and identify what type of control you are proposing at each stage of your proposed system. (10 marks) Part B a) Tyres4U is a company that supplies and fits new car tyres to customers cars, at the year-end stock reconciliation it was noted that 200 tyres were missing with a value of 13,000. There are no continuous stock records and the eight tyre fitters select the tyres from stock, fit them and produce customer invoices from the computerised system. b) Alan is the cashier of Rose Limited, a company which supplies security services. He is responsible for the payments of expense claims by the security staff. Upon examination of the draft annual financial statements the managing director was surprised to see that expenses had more than doubled since the previous year-end when income was approximately 8% lower. c) The gross profit of Adam Child Care Safety Products Ltd was lower than expected. An investigation revealed that James who is responsible for the production of the sales invoices had priced many invoices below the list prices. His wife is a sales rep for the Bolton area which is where the invoice pricing issue arose and it was noted that her sales commissions had increased by 50% in the year. Question 2 continues overleaf

4 Page 4 of 7 Question 2 continued. d) The treasurer of a local charity confessed to the newly appointed auditor that she has misappropriated the weekly donations from several regular donors over several years. Donations were in sealed envelopes and the charity helpers always counted and banked the notes and coins in the donation envelopes, the envelopes were handed to the treasurer every week. e) The newly appointed auditor of Jezza Ltd, an engineering company attempted to reconcile the individual items of Plant and Equipment with the purchases and disposals since the reconciliation was last performed six years ago. The exercise resulted in approximately fifty machines that were unaccounted for. For each scenario above, suggest what might of happened in each of the cases and design an internal control procedure that would help prevent such incidences reoccurring. (15 marks) End of Question 2 Question 3 is overleaf

5 Page 5 of 7 QUESTION 3 You are the auditors of Thames Ltd, a manufacturer of porcelain dinner plates, which exports 40% of its sales to one company in the USA and invoices this one company in US dollars ($) (all other sales are invoiced in sterling ). The company has a reporting period end date of 31 March 2016 and you are planning to commence your financial statements audit on 1 June Included in the statement of financial position is an amount of 2,850,000 in relation to trade receivables which has been stated net of a provision for doubtful debts of 5% of the gross receivables balance. In previous years there has been an extremely poor response to the receivables circularisation and this year the audit partner has decided that such a test will not be conducted. Included within the trade receivables balance is an amount of $185,000 which was translated into sterling at the spot rate on the date of the sale on 1 March Additional information: Exchange rates 1 March = $ March = $1.75 a) Explain what substantive tests (including financial statement assertions) you would carry out to verify the trade receivables. (14 Marks) b) State the audit tests you would conduct in order to form an opinion on the doubtful debts provision along with any action you would take if you concluded it was misstated. (6 Marks) c) Explain the audit tests you would conduct in relation to the US dollar ($) balance and state the adjustment (if any) that would be made to the relevant balances in the financial statements. (5 Marks)

6 Page 6 of 7 QUESTION 4 a) ISA 505, External confirmations, states that the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level. Required i) List four examples of external confirmations and provide examples identifying why these confirmations would benefit the auditor in performing audit work on certain account balances. (4 marks) b) Julie Ltd operates 6 warehouses for the storage of food throughout the UK. The company (in order to maximise purchase discounts) makes bulk purchases from manufacturers and suppliers based in the UK and abroad. Julie Ltd distributes these goods to supermarkets and wholesalers. Each warehouse maintains its own inventory records from goods inwards and despatch notes. The head office in Bolton maintains a financial control over the inventory based on the daily value of sales and a value of daily purchases (based on selling price). The company has a year-end date of 30 April 2016 which falls on a Saturday and the financial director has arranged for the inventory count to be held the following Wednesday (4th May 2016) and the warehouses will be closed on that day. The inventory sheets are to be priced at selling price. Required i) State the audit procedures you would undertake in respect of the physical inventory take (before and during). (15 marks) ii) State the matters to which you would give attention to ensure that the correct quantities and values of inventory items are included in the financial statements. (6 marks)

7 Page 7 of 7 QUESTION 5 You have just been appointed the external financial statements audit senior for a new client Care4U which is a newly formed charity looking after children. The charity has grown significantly since it started last year and as a result the finance director (Bill Baggins) decided to create an audit committee as part of a corporate governance framework. In addition to this committee he also employed a firm of internal auditors as he wishes to ensure that the charity is a transparent as possible in all of its activities, including financial reporting. However, Mr Baggins has only ever worked at small organisations and has never been audited. He noted that during the tendering process and subsequent presentations your firm (TickitBok LLP) referred to a letter of engagement, a letter of representation, a letter of weakness and an audit report/opinion and this has concerned him as he is unaware what each of these actually are. a) Write a letter to Mr Baggins that outlines exactly what each of the four items he is concerned about actually are, when these will be issued and a brief outline of the contents of each. (20 marks) b) Briefly explain what the differences are between internal and external auditors. (5 marks) END OF QUESTIONS