This paper is not to be removed from the Examination Halls

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1 ~~AC3093 ZB d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC3093 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Auditing and Assurance Thursday, 14 May 2015: 14:30 to 17:30 Candidates should answer FOUR of the following EIGHT questions: TWO from Section A, ONE from Section B and ONE further question from either section. All questions carry equal marks. PLEASE TURN OVER UL15/0178 Page 1 of 6

2 SECTION A Answer at least two questions, and no more than three questions from this section. A total of four questions should be answered with at least one from Section B. 1. Hull LLP is a firm of chartered accountants which has audited Riding plc since Riding plc is an oil refining company with annual turnover of 2bn. and net profits of 350m. In January 2013, during the audit of the financial statements for the year ended December 31, 2012, the audit team discovered that contract documentation for a number of purchase orders for crude oil from one supplier, Caistor, were missing. The total value of the missing contracts came to 5m. The matter was raised with the purchasing director, John Scotter, who had to approve all purchase contracts prior to payment. Scotter initially dismissed it on the grounds that it was immaterial, the total cost of oil purchases was in excess of 1bn. When pressed by the audit manager, he gave assurances that these were valid transactions made with reputable suppliers. However, he promised that when he had spare time, he would instruct staff to find the missing documents. In fact, the middle of 2013 proved to be a turbulent time for oil producers with continued unrest in the Middle East and in Russia. Riding s staff were under pressure with routine work and the missing documents were never found. The issue of the missing documents was one of the outstanding matters discussed at a meeting between the audit team and the audit partner, Raj Laceby, in February Laceby raised the matter with the finance director, Bernard Tetney, at a meeting in May prior to the signing of the auditors report. Tetney said that they had more important things to worry about; he assured Laceby that he had no doubts about the transactions but he promised to look into the matter of the missing documents and to tighten up controls in that area. Laceby accepted these assurances. He had worked under Tetney when the latter was a partner in Hull LLP. Tetney resigned from Hull in 2010 and joined Riding in During the next audit early in 2014, the auditors discovered that the system had not changed since their audit last year. Again documents supporting purchase contracts with the supplier, Caistor, could not be found. This time the auditors extended their testing and discovered more unsupported transactions totalling more than 20m. The audit manager quizzed Scotter who became increasingly agitated. Eventually he admitted to having a close working knowledge of Caistor since he was a director of that company too. He begged the audit manager not to tell the other board members of Riding. The audit manager told him that he would have to report it to the audit partner who would almost certainly want to report it immediately either to the board or to the audit committee. The next day Scotter failed to show up for work and could not be contacted on his home phone or on his mobile. That same day, Tetney ordered a detailed investigation. This investigation eventually discovered that Caistor was a fictitious company set up by Scotter in order to defraud Riding. Caistor had invoiced Riding for supplies of oil which had never been delivered. Riding had paid 45m over 5 years for these non-existent supplies. Required: Advise the partners of Hull LLP on their likely legal position, if Riding plc were to sue them for negligence in the conduct of the audit. You should cite examples of case and/or statute law when appropriate. Outline the steps prudent auditors take to reduce the risk of claims for negligence. UL15/0178 Page 2 of 6

3 2. Cisco Ltd (Cisco) is a toy manufacturer. Cisco employs 200 people of three categories: salaried, hourly paid and commission-only staff. Tina Garner is the payroll manager and has a team of two members of part-time staff, Paula and John. Required Salaried employees There are 60 salaried office-based employees; all are members of the company s pension scheme which aims to provide income for employees once they have retired from work. Every month, one of Tina s assistants (Paula) reviews any adjustments required to the salaries for that month. These adjustments range from sick pay, maternity pay, salary increases, and part-time adjustments. Staff must inform the payroll office via of any adjustments required by the 20 th of each month. Paula then reviews and actions these adjustments and submits a summary from the computer system to Tina for authorisation. The monthly salaries are processed via computer software, checked and approved by Paula and then submitted for final authorisation by the finance director before being paid by bank transfer on the 25 th of each month. Staff records include details of their bank accounts and other personal information and are kept electronically. These records are only accessible by Tina and her team. Any change made to a record requires the team member to enter his/her unique pin code. Hourly rate employees A clocking-in system is used by the 120 factory and warehouse staff. The system is not supervised. A higher rate is paid for overtime but the hours must be authorised in advance by a manager. At the end of each week the clocking-in system sends John a report which he uses to process the weekly wages. Tina authorises the final payroll calculations and then John processes the payments. Some staff have elected to be paid in cash which is distributed by John on Friday afternoons; most employees choose to be paid by bank transfer. Commission based employees There are only 20 commission based employees. Monthly commission payments are made based on the previous month s sales for each employee. The accounts team produce a spread-sheet showing the relevant monthly sales for each employee and this is reviewed by Tina who calculates the appropriate commission payments due. Tina then submits the information to Paula who processes the tax and other deductions and calculates the net pay for each employee. No further authorisation is deemed necessary at this stage before Paula processes the bank transfer by the 25 th of each month. Identify five strengths and five weaknesses in the system and for each weakness you should also recommend an appropriate solution. What audit assertions would you, as auditor, test in your audit of Cisco s commission based payments and what procedures would you use to test those assertions? UL15/0178 Page 3 of 6

4 3. Fundamentals plc is a UK-listed company providing training courses in everything from accountancy to plumbing in many countries. The company currently has five subsidiaries based in France, Spain, Germany, Ireland and Australia. Fundamentals plc s year end is 31 st March. The total revenue of Fundamentals plc and its subsidiaries for the year to 31 st March 2015 is 150m and net profit is 15m. Required: Major changes in the year to 31 st March 2015 are: The company s chief financial officer, Tseng, resigned having been in post for six years. He was replaced through the internal promotion of the company s financial controller who had worked under Tseng for five years. The reasons behind Tseng s departure were said to be personal but the financial media were never satisfied by this explanation and the company s share price has suffered as a result of the uncertainty over the situation. The company has expanded its customer base into Australia for the first time this year. Despite some teething problems the move appears to have been a success with revenue equivalent to 10m and profit equivalent to 2m. However, the audit team found it difficult to obtain documentation from the Australian subsidiary company. The company plans to expand into China and India. These plans will require a combination of rights issues to existing shareholders and bank loans to increase both forms of finance by 20%. During a meeting held between the auditors, the audit committee and the chief executive officer just before the year end the auditors were informed that the Board were very keen to work closely with the audit committee and the auditors to ensure a successful audit outcome this year. The auditors must carry out an audit for the Fundamentals plc group although the subsidiary companies are all audited separately by local auditors. When planning the audit of the Fundamentals plc group what are the audit risks that the auditor should consider and what audit work should be carried out in response to these risks? To what extent can one auditor rely on the work of another and what are the key factors to consider? UL15/0178 Page 4 of 6

5 4. You are an audit partner in a Dragon & Co., a firm of registered auditors. The following extracts all relate to some of your audit clients: i. You are carrying out the audit of Vine Ltd in respect of the year ended 31 st March During your routine review of the company s correspondence files you discover that the company has been in dispute with a customer over a warranty on one of its products. When you question the sales director about this issue he tells you that he is confident the complaint has no substance and is unlikely to be successful. ii. iii. iv. You have just completed the audit of Sloane Ltd in respect of the year ended 31 st December During the final audit meeting you receive an anonymous note informing you that since the year-end one of Sloane Ltd s major clients has become insolvent. The note tells you that the Sloane Ltd s board had made the decision not to tell you about the issue due to the effect it would have on the financial statements. Bond Ltd manufactures computer equipment. Inventory is a material area of its financial statements. Your appointment as auditor to Bond Ltd was made just after its year-end. You were therefore not able to attend the company s physical count of its inventory. Leicester plc has a number of branches across the UK. One branch is in a remote location in the far north of Scotland. You have never visited this branch because it is relatively small and you could not justify incurring the travel cost. Required: v. During the audit of the accounts receivable section of Mayfair plc, your audit team were unable to locate a file containing suppliers statements for the last two months of one year and the first month of the new financial year. All other records were in the correct place. For each issue above explain why there might be a problem for you as auditor, what additional audit work you would need to do in response to the problem and how the outcome might affect your final audit opinion. In order for auditors to carry out an efficient and effective audit they are given certain legal rights in the UK under the Companies Act State these rights excluding those related to the resignation and removal of auditors. UL15/0178 Page 5 of 6

6 SECTION B Answer one question and no more than one further question from this section. A total of four questions should be answered with at least two from Section A. 5. In the context of audit evidence, explain what is meant by sufficient and appropriate and discuss the claim that all evidence is good evidence. 6. Explain how auditing is regulated at an international level and discuss the advantages and disadvantages of the harmonisation of auditing standards. 7. Explain to a non-accountant the value of an audit. 8. Using reasoned argument, consider whether the prevalence of computerised accounting systems makes the job of the external auditor more or less difficult. END OF PAPER UL15/0178 Page 6 of 6