Interim Assessment

ACCA INTERIM ASSESSMENT

Audit and
Assurance

JUNE 2009

QUESTION PAPER
Time allowed

Reading time: 15 minutes

Writing time: 3 hours

All FIVE questions are compulsory and MUST be attempted

Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall

Kaplan Publishing/Kaplan Financial
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ACCA F8 (INT) Audit and Assurance

© Kaplan Financial Limited, 2008

All rights reserved. No part of this examination may be reproduced or transmitted in any form
or by any means, electronic or mechanical, including photocopying, recording, or by any
information storage and retrieval system, without prior permission from Kaplan Publishing.

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Interim Assessment

All FIVE questions are compulsory and MUST be attempted
QUESTION 1
Accounts receivable confirmations are a useful method of obtaining audit evidence relating to
accounts receivables.
Required:
(a)

In relation to accounts receivables confirmations:
(i)

explain the difference between a positive and a negative confirmation

(ii)

explain the two different types of positive confirmation and the advantages
and disadvantages of each

(iii)


give some examples of reconciling items highlighted by accounts receivables
confirmations.
(7 marks)

(b)

Describe the principal risks associated with financial statement assertions relating to
accounts receivables.
(3 marks)

(c)

Goodfoot is a small company which manufactures high quality shoes and sells them
to small retailers. This is your first year as auditor. Goodfoot has a receivables ledger
with approximately 750 accounts. A number of the accounts are old, some have nil or
credit balances and some should probably be written off. The company’s client base
is mixed. Bad accounts have generally represented about 2% of the total accounts
receivable figure and a general provision of 1.5% has been made in the past in
addition to any specific provisions. Most of the bad receivables relate to smaller
customers but there are some very slow-moving larger accounts in the current year.
The total value of accounts receivable is $750,000, 60% of which comprises some 30
large accounts and 40% of which comprises a large number of small accounts.
You have tested the system of internal controls over receivables and it appears to be
working adequately. In your experience accounts receivable confirmations in this
sector generally have a response rate of just over 50%.
Required:
(i)

Describe the audit work you will perform on accounts receivable and bad

debts at Goodfoot.
(12 marks)

(ii)

Develop a lead schedule for the receivables section of your audit working
papers.
(8 marks)

Note: You are not required to perform numerical calculations in this question.
(Total: 30 marks)

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ACCA F8 (INT) Audit and Assurance

QUESTION 2
'The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.'
ISA 500 para 2
Required:
Discuss what is meant by sufficient appropriate audit evidence.
(10 marks)

QUESTION 3
Collins Cosmetics is a long-established family company that manufactures perfumes. These
are sold to customers who re-package and market them under their own brand names. The

company has five manufacturing units spread across its home country.
Fred Goodwin, who had been managing director for 21 years, died just over a year ago. Mike
Barlow has been promoted from sales director to take over as managing director, and a new
sales director has been brought in from outside the company.
The finance director, Ben Vashilli, has recently moved from a full-time to a part-time role, as
he wishes to spend more time with his family. He has announced his intention to leave within
the next 12 months, and the company is seeking a full-time replacement.
Profits have been falling over the last three years. The company wishes to gain a listing on
the Stock Exchange, and all efforts are being focused on reversing the alarming profit trend. A
bonus scheme has recently been introduced, where certain managers and directors are paid
a lump sum if production exceeds a certain level.
You are the auditor of Collins Cosmetics, and are about to commence the planning for the
forthcoming audit.
Required:
(a)

Explain what is meant by the following terms:
(i)
(ii)
(iii)
(iv)

Audit risk
Inherent risk
Control risk
Detection risk

(8 marks)

(b)


List and explain the factors specific to Collins Cosmetics that you would consider
when assessing audit risk.
(10 marks)

(c)

Explain how an auditor's approach might be affected if he concludes that there is high
inherent risk.
(2 marks)
(Total: 20 marks)

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Interim Assessment

QUESTION 4
(a)

You work for a firm of auditors which has seven offices throughout England and
Wales. The firm’s largest client, in terms of fee income, is Mart, a company which has
grown steadily through a mixture of organic growth and acquisition of companies in
the same industry sector.
Your firm has acted for this client since its incorporation 20 years ago and, in addition
to the statutory audit, provides a range of non-audit services including tax planning
(for the company and its individual directors) and consultancy work in respect of
Mart’s acquisition policy.

Earlier this year, the finance director of Mart retired and was succeeded by a former
member of your firm’s staff who had managed the audit of Mart for the preceding four
years.
Required:
Discuss the ethical and professional issues raised by the situation described above,
and identify the measures that should be implemented by your firm in order to
mitigate any threats to objectivity which might arise.
(10 marks)

(b)

You work for a medium-sized firm of Chartered Certified Accountants with seven
offices and 150 employees. You firm has been asked to tender for the provision of
statutory audit and other services to Billington Travel, a private company providing
discounted package holiday services in the Mediterranean.
The company is growing fast and would represent a substantial amount of fee income
for your firm. The finance director has explained to you that the company would like
the successful firm to provide a number of different services. These include the
statutory audit and assistance with the preparation of the financial statements. The
company is also struggling with a new computer system and the finance director
considers that a systems review by your firm may be helpful. Your firm does not have
much experience in the travel sector.
Required:
With reference to the ACCA’s Code of Ethics and Conduct, describe the ethical
matters that should be considered in deciding on whether your firm should tender for:
(i)

the statutory audit of Billington Travel

(5 marks)


(ii)

the provision of other services to Billington Travel.

(5 marks)
(Total: 20 marks)

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ACCA F8 (INT) Audit and Assurance

QUESTION 5
The directors of Lopit, a newly-formed company, have written to you with a view to securing
your services as auditor. Within their letter, you note the following comments:
'Your duties and rights as auditor will be determined by the board of our company. In the
main, these duties are in line with the usual legal requirements, but in the event of conflict or
exclusion we will indemnify you against any legal action brought as a consequence of the
position adopted. The board also retains the right to dismiss you at any time without
necessarily disclosing the reasons for their action.'.
Required:
(a)

Describe your understanding of your duties as auditor of Lopit.

(5 marks)


(b)

What is your relationship as the auditor to the directors of Lopit?

(2 marks)

(c)

Outline your usual legal rights as auditor of a limited company.

(6 marks)

(d)

Would you agree with the directors that they have the authority to dismiss you?
(2 marks)

(e)

What steps would you take prior to accepting the appointment as auditor to the
company?
(5 marks)
(Total: 20 marks)

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