UNIVERSITY OF BOLTON BUSINESS SCHOOL ACCOUNTANCY PATHWAY TRIMESTER 2 EXAMINATIONS 2015/16 ADVANCED AUDIT AND ASSURANCE MODULE NO: ACC7507

Transcription

1 BBS042 UNIVERSITY OF BOLTON BUSINESS SCHOOL ACCOUNTANCY PATHWAY TRIMESTER 2 EXAMINATIONS 2015/16 ADVANCED AUDIT AND ASSURANCE MODULE NO: ACC7507 Date: Thursday 19 th May 2016 Time: 2:00pm to 5:00pm INSTRUCTIONS TO CANDIDATES: There are four questions on this paper. This examination is 3 hours Answer question in section A, and Two from Three in section B. This is a closed book examination

2 Page 2 of 7 Section A: Question 1 is compulsory and MUST be attempted Question 1 You are an audit manager at Baker & Co Chartered Certified Accountants and are currently planning the audit of your client, Excavate Co, a manufacturer of machinery used in the extraction of minerals. The year end for the company is 31 March The draft financial statements show revenue of 250m ( m), profit before tax of 11.2m ( m) and total assets of 190m ( m). Your firm was appointed as auditor to Excavate Co for the first time in November The audit partner has sent you this To: Audit Manager From: Audit Partner Subject: Audit planning Excavate Co Hello I would like you to start planning the audit of Excavate Co. I have provided you with minutes of a meeting I had last week with Gloria Gaynor, the company s finance director, and some background information about the company. Using this information I would like you to prepare briefing notes for my use in which you evaluate the audit risks to be considered when planning the audit of Excavate Co; recommend the principal audit procedures to be performed in respect of the estimated warranty provision and opening balances; and discuss why the identification of related parties, and material related party transactions, can be difficult for auditors. Thank you. Excavate Co designs, constructs and installs machinery for four key customers. Payment is due in three instalments: 60% is due when the order is confirmed (stage one), 15% on delivery of the machinery (stage two), and 25% on successful installation in the customer s site (stage three). Generally it takes six months from the order being finalised until the final installation. At 31 March 2016, there is an amount outstanding of 5.7m from Tim Tin Mine regarding a disputed stage three payment. Tim Tin Mine is refusing to pay until the machinery, which was installed in December 2015, is running at 100% efficiency. Question 1 continues overleaf

3 Page 3 of 7 Question 1 continued Several weeks before the year end Excavate Co was contacted by lawyers of Emerald Co, a customer of Excavate. Emerald Co is claiming damages for injuries suffered by a drilling machine operator whose leg was severely injured when a machine malfunctioned. Gloria Gaynor, the finance director of Excavate Co, has told you that the claim is being ignored as it is generally known that Emerald Co has a poor health and safety record, and thus the accident was their fault. Two orders which were placed by Emerald Co in February 2016 have been cancelled. Work in progress is valued at 17m at 31 March A physical inventory count was held on 17 March The chief engineer estimated the stage of completion of each machine at that date. One of the major components included in the mineral extracting machinery is now being sourced from overseas. The new supplier, Grant Co, is located in the USA and invoices Excavate Co in Dollars. There is a trade payable of 3.0m owing to Grant Co recorded within current liabilities. All machines are supplied carrying a one year warranty. A warranty provision is recognised in the statement of financial position at 5.0m (2015 4,8m). Gloria Gaynor estimates the cost of repairing defective machinery reported by customers, and this estimate forms the basis of the provision. Gloria Gaynor owns 60% of the shares in Excavate Co. She also owns 55% of Pacific Co, which leases a head office to Excavate Co. Gloria is considering selling some of her shares in Excavate Co in May, and would like the audit to be finished by that time. Required: Respond to the from the audit partner. Professional marks will be awarded for the presentation, clarity of explanations and logical flow of the answer. (31 marks) (4 marks) (Total: 35 marks) End of question 1 End of Section A

4 Page 4 of 7 Section B: TWO questions ONLY to be attempted Question 2 Marsh Co is a large, private company, whose business activity is marketing and organising conferences, meetings and celebratory events for companies. Marsh Co was founded 12 years ago by David Newman and his sister, Mildred, who still own the majority of the company s shares. The company has grown rapidly and now employs more than 250 staff in 20 offices. You are a manager in the business advisory department of Bridge & Co. Your firm has just been engaged to provide the internal audit service to Marsh Co. In your initial conversation with David and Mildred, you discovered that currently there is a small internal audit team, under the supervision of Katie Cautious, a recently qualified accountant. Before heading up the internal audit department, Katie was a junior finance manager of the company. The members of the internal audit team will be reassigned to roles in the finance department once your firm has commenced the provision of the internal audit service. Marsh Co is not an existing client of your firm, and to gain further understanding of the company you held a meeting with Katie Cautious. Notes from the meeting are shown below. Notes of meeting held with Katie Cautious The internal audit team has three employees, including Katie, who reports to the finance director. The other two internal auditors are currently studying for their professional examinations. The team was set up two years ago, and initially focused on introducing financial controls across all of Marsh Co s offices. Nine months ago the finance director instructed the team to focus their attention on introducing operational controls in order to achieve cost savings due to a cash flow problem being suffered by the company. The team does not have time to perform much testing of financial or operational controls. In the course of her work, Katie finds many instances of management policies not being adhered to, and the managers of each location are generally reluctant to introduce controls as they want to avoid bureaucracy and paperwork. As a result, Katie s recommendations are often ignored. Three weeks ago, Katie discovered a fraud operating at one of the offices while reviewing the procedures relating to the approval of new suppliers and payments made to suppliers. The fraud involved an account manager authorising the payment of invoices received from fictitious suppliers, with payment actually being made into the account manager s personal bank account. Katie reported the account manager to the finance director, and the manager was immediately removed from office. This situation has highlighted to David and Mildred that something needs to be done to improve controls within their organisation. Question 2 continues overleaf

5 Page 5 of 7 Question 2 continued David and Mildred are deciding whether to set up an audit committee. Under the regulatory framework in which it operates, Marsh Co is not required to have an audit committee, but a disclosure note explaining whether an audit committee has been established is required in the annual report. Required: (a) Evaluate the benefits specific to Marsh Co of outsourcing its internal audit function. (b) Explain the potential impacts on the external audit of Marsh Co of outsourcing its internal audit function. (6 marks) (4 marks) (c) Recommend procedures that could be used by your firm to quantify the financial loss suffered by Marsh Co as a result of the fraud. (5 marks) (d) Assess the benefits and drawbacks for Marsh Co in establishing an audit committee. (5 marks) (Total: 20 marks) Question 3 Lang and Redbow Lang and Redbow is a rapidly growing firm in new house construction. Having started as a small organisation specialising in starter homes, their operations now include major developments including executive housing and contracts with local authorities for affordable housing. Despite the increase in the scale of their operations the two founders manage the operation on a day to day basis, and both believe their detailed understanding of the business has been a major part of their success. Several years ago they did however appoint a Finance Director, and the three of them make up the Board of Directors. Question 3 continues overleaf

6 Page 6 of 7 Question 3 continued Recently Lang and Redbow bought new land on the outskirts of a major city having obtained financial backing from a venture capitalist. There are however some legal complications with the development, in particular, regarding planning permission and the current Board members are struggling to understand the technicalities and to give the issue sufficient time given their current workload. The Finance Director now believes that the Board should be strengthened by the appointment of non-executive directors. The original directors are not convinced, and have asked you to prepare a report. Required Compile a report advising the Board on the merits of introducing one or more nonexecutive directors. Your report should cover the benefits (8 marks), the potential problems (6 marks) and the range of skills and other characteristics that are desirable in those appointed. (6 marks) Total: 20 marks Question 4 (a) You are a manager at Gibbs & Co. You are currently reviewing the working files for two audits, both with 31 March 2016 year-ends. In particular you have identified the following issues: Smart Co The Chairman s report of Smart Co states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.2% of total revenue for the year. The audit senior is satisfied that the revenue figure in the financial statements is correct. The audit senior has noted that an unmodified audit report should be given as the audit opinion does not extend to the other reports. (5 marks) Question 4 continues overleaf

7 Page 7 of 7 Question 4 continued Crest Co Procedures on the audit of Crest Co identified a transfer of cash from Harriet Co on 15 April The audit senior documented a discussion with the FD of Crest, who explained that Harriet commenced trading on 4 April 2016, after being set up as a wholly-owned subsidiary of Crest. The audit senior has noted that, although no other evidence has been obtained, an unmodified opinion is appropriate because the matter does not impact on the current year s financial statements. (6 marks) Required: Critically evaluate the suitability of the audit senior s proposals for the auditors reports. Note: the mark allocation is shown against each of the issues above. (b) Compare and contrast the responsibilities of management, and of auditors, in relation to the assessment of events after the reporting period (subsequent events). Include a description of appropriate audit procedures. (9 marks) (Total: 20 marks) END OF QUESTIONS