Fundamentals Level – Skills Module

Audit and Assurance

November 2022 – MOCK

TEST

ACCA

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Section A – ALL 15 questions are compulsory and MUST be
attempted
Section B – ALL THREE questions are compulsory and MUST
be attempted

The
Association of
Chartered
Certified
Section A – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks

Questions 1-5 relate to the following scenario

Medico is a pharmaceutical company manufacturing life saving drugs and invests significant
amounts annually in researching and developing new medicines aimed at lowering mortality rates.

The annual audit is nearly complete. As audit manager you have reported to the engagement partner
that Medico is having some financial difficulties. Income has fallen due to the adverse effect of two
high-profile court cases, where Medico’s medicines and related services were found to be in error.
Not only did this provide adverse publicity for Medico, but also a number of clients withdrew their
contracts. A senior employee then left Medico, stating lack of investment in new machines was
increasing the risk of faulty medicines to customers.

A cash flow forecast prepared internally shows Medico requiring significant additional cash within
the next 12 months to maintain even the current level of research. With the forecasted cash being
negative for the upcoming 15 months, Medico has applied for a loan that was not approved at year-
end. Medico’s auditors have been asked to provide a negative assurance report on this forecast.

Management has not made any changes to financial statements for the matters described above and
has provided auditors with draft financial statements and accompanying records.

1. Which of the following correctly describes an auditor’s responsibility for the going
concern assumption?

A. Disclose uncertainties regarding going concern in financial statements.

B. Evaluate the reasonableness of assumptions of going concern.
C. Assess the ability of the company to continue in the foreseeable future.
D. Provide a disclosure if financial statements are not prepared on a going concern basis.

2. Which of the procedures would be appropriate to confirm accuracy of the negative

cash flow forecast for the upcoming 15 months?

A. Review minutes of board meetings to confirm whether cash flow forecast has been
correctly prepared.
B. Review correspondence with the bank to confirm whether the loan is likely to be
approved.
C. Review customer contracts to ascertain the level of sales post year-end.
D. Consider how accurate company forecasts have been in the past by comparing past
forecasts with actual outcomes.

3. Medico’s legal counsel has confirmed that if the claims against Medico are successful,
the amount payable is very likely to be significant and with the present cash flow
forecast, the ability to pay seems unlikely. They are uncertain about the likelihood of a
successful claim, as similar claims have not been brought against the company.
 Assuming the auditor has confirmed the above, what will be the impact on the auditor’s report of
matter described above if management refuses to make appropriate adjustments to financial
statements?

A. Audit report will be modified with an except for qualification on opinion and discussion of matter in
basis of opinion paragraph.
B. Audit report will be modified with an Emphasis of Matter paragraph and an unqualified opinion.
C. Audit report will be unmodified with an unqualified opinion.
D. Audit report will be modified with an adverse opinion and a discussion of the matter in basis of
opinion paragraph.

4. In order to confirm whether the fall in income is likely to affect going concern of Medico, which of
the following will be appropriate procedures applied by the auditor?

I. Obtain and review the minutes of board meetings to confirm whether directors have approved a
strategy to improve revenue.
II. Review latest available interim accounts and management accounts to ascertain the fall in revenue and
whether that is likely to affect going concern.
III. Inspect correspondence with the company’s bankers to assess the availability of financing such as
overdrafts and loans.

A. I and II
B. I and III
C. II and III
D. I, II and III

5. Assuming that you have confirmed that Medico is in fact NOT a going concern, which of the
following correctly describes the auditor’s course of action?

A. An adverse opinion will be given on financial statements if management is not ready to give a
disclosure regarding the fact that Medico is not a going concern.
B. Give an Emphasis of Matter paragraph in financial statements if management has not made proper
adjustments to financial statements.
C. Advise the management that financial statements should be prepared on break up basis, discussing
reasons for the auditor’s judgment.
D. Disclose this matter to regulatory bodies as soon as it is confirmed that Medico is not a going concern.
Questions 6-10 relate to the following scenario
You are an audit manager in McBeth & Co, a firm of Chartered Certified Accountants. You are preparing the
engagement letter for the audit of Hamlet, a public listed company, for the year ending 30 June 2016.Hamlet
has grown rapidly over the past few years, and is now one of your firm’s most important clients.
Hamlet has been an audit client for eight years and McBeth& Co has provided external audit, tax consultation
and other non-audit services during this time. Combined, these services comprise a substantial portion of
McBeth’s annual income every year.
The client has been satisfied with the services provided, although the taxation fee for the period to 31
December 2015 remains unpaid. Audit personnel available for this year’s audit are most of the staff from last
year, including Mr. Gary, an audit partner and Mr. Hugh, an audit senior. Mr. Gary has been the audit partner
since Hamlet became an audit client.
You are aware that Karen Gary, the daughter of Mr. Gary, has recently been appointed the financial director
at Hamlet. Karen and Mr. Gary are not concerned about this as they feel they are both bound by
confidentiality required by their professional codes. To celebrate her new appointment, Karen has suggested
taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.

6. With respect to the audit team, which of the following statements is not correct?
A. Mr. Gary should not be the partner as his daughter is the finance director and he may not be able to
give an independent opinion.
B. Mr. Hugh should be retained as a senior as he has knowledge of business that can facilitate
planning.
C. Mr. Gary should not be the engagement partner as he has been auditing the same audit client for a
long time affecting his ability to give an independent opinion.
D. The entire audit team should be changed as the team has audited Hamlet last year and is no longer
independent.

7. For which of the following situations can Mr. Gary make VOLUNTARY disclosure of client’s
information?
I. If an auditor knows or suspects his client is engaged in money laundering
II. Where disclosure is made to non-governmental bodies
III. Where it is in the public interest to disclose
IV. If an auditor suspects his client has committed terrorist offences
A. I and IV
B. I and III
C. II and IV
D. II and III

8. Which of the following options correctly identifies the threats to independence from the fee
earned form non audit services and identifies the appropriate safeguard?
A. Self Review and each assignment should be performed at a different time to prevent self-review.
B. Self Interest and the auditor must ensure that he is not involved in any decision making activities
C. Self Review and a full disclosure must be made to Those Charged with Governance of the services
provided.
D. Self Interest and a pre and post issuance of report review should be conducted of the auditor’s
work.
9. Which of the following correctly identifies an appropriate safeguard for the unpaid taxation fee?
A. Outstanding fee should be discussed with Those Charged with Governance and a payment
schedule should be negotiated and agreed upon.
B. A second opinion on McBeth’s work should be obtained to ensure that quality of work was not
compromised.
C. Audit assignments should be rejected in order to ensure that fee is kept below a threshold.
D. Disclose outstanding fee to a regulatory body to ensure that independence is not threatened.

10. Othello Co, a close competitor of Hamlet, has recently approached McBeth for their year-end audit
assignment. Mr. Gary is not sure how to proceed however is inclined to accept, as Othello is a
significant client and will reflect positively on the firm’s reputation.

Which of the following correctly specifies what Mr. Gary should do in order to mitigate the
threat to the auditor’s independence, if any?
A. Modifying the audit plan for both the clients will help auditors ensure that any threat is mitigated.
B. McBeth must not accept Othello’s audit assignment, as the threat is significant and cannot be
mitigated using any other safeguard.
C. McBeth should make full disclosure to both Hamlet and Othello’s board so that they are aware that
auditor is acting for the other party as well.
D. Audit partner should be the same for both clients, as he will have sufficient knowledge of the
industry.
Questions 11-15 relate to the following scenario
Xavier is a rapidly expanding computer software company. Turnover has increased by about 20% p.a. for
the last five years, to the current level of $50 million. Net profits are also high, with an acceptable return
being provided for the four shareholders. With offices spread all over the country, there has been an increase
in manpower
The internal audit department was established last year to assist the board of directors in their control of
the company and to prepare for a possible listing on the stock exchange. The Managing Director is keen to
follow the principles of good corporate governance with respect to internal audit. He has hired a Chief
Internal Auditor (CIA), an old friend with an excellent track record however is unsure about whether an
Internal Audit department should be set up or should the activity be outsourced.
In a recent board meeting the Finance Director raised several concerns including the fact that he did not see
why Xavier needed an internal auditor when substantial costs were incurred in statutory audit. He also
questioned the independence of the CIA and the fact that the Audit Committee with limited knowledge of the
business would not be able to supervise the Internal Audit function. Most of the directors agreed with the
Finance Director’s point of view.

11. Which of the following statements relating to internal and external auditors is correct?
A. Internal auditors are required to be members of a professional body
B. Internal auditors’ scope of work should be determined by those charged with governance
C. External auditors report to those charged with governance
D. Internal auditors can never be as independent of the company as the external auditors.

12. To address concerns raised by the Finance Director, the Managing Director has given the board
suggestions on ways to keep the internal audit function independent. Which of the following
statements about the independence of internal audit function is correct?
A. The scope of internal audit assignments is decided by the Managing Director in order to ensure
that they are free from influence.
B. Internal audit reports must be addressed to the audit committee that would ensure that
recommendations are implemented.
C. Internal auditors should all be hired based on their experience and skill to ensure that their
assignments are free from influence.
D. CIA must directly report to the Finance Director in order to ensure his recommendations are
independent.

13. Which of the following controls would be applied to ensure that the outsourced internal audit
function is being maintained to a high standard?
A. Xavier should ensure that appropriate audit methodology is being used, including clear
documentation of audit work carried out, adequate review, and appropriate conclusions drawn.
B. Internal audit function should be outsourced to the same firm providing external audit services to
ensure a deeper understanding of organizations systems.
C. Cost of the outsourced internal audit services should be kept to a minimum to prevent any
financial interest of the internal auditors in Xavier.
D. Xavier should carry out a cost benefit analysis for outsourcing internal audit in order to ensure it is
resulting in value addition for the company.
14. Which of the following options contains correct statements regarding the difference between
external and internal audit?
A. The external auditor ascertains the truthfulness and accuracy of the financial statements, whereas
the internal auditor advises regarding management decisions.
B. The external auditor ascertains the truthfulness and fairness of financial statements, whereas the
internal auditor is concerned with operations of the entity i.e. both financial and nonfinancial
matters.
C. The external auditor ensures that financial statements are free from material misstatements,
whereas the internal auditor is concerned with the financial matters relating to the entity.
D. The external and internal auditors are concerned with the operations of the entity i.e. both financial
and non-financial matters.

15. Which of the following statements is true regarding the Finance Director’s statement about the
Audit Committee?
A. Finance Director is right; the Audit Committee does not have sufficient knowledge of business to
be able to supervise the internal audit function.
B. Finance Director is incorrect; the external auditors are also members of audit committee and can
thus supervise the internal audit assignments.
C. Finance Director is right; the Audit Committee with executive directors will not be able to
maintain independence of the internal audit function.
D. Finance Director is incorrect; the Audit Committee is independent with at least one finance
professional hence enabling it to supervise internal audit function.
Section B – ALL THREE questions are compulsory and MUST be attempted

Question 16
Safe Co grows crops on a large farm according to strict organic principles that prohibits the use of artificial
pesticides and fertilizers. The farm has an organic certification, which guarantees its products are organic.
The certification has increased its sales of flour, potatoes and other products, as customers seek to eat
more healthily.
Safe Co is run by two managers who are the only shareholders. Annual revenue is $25 million with a profit
before tax of 10%. Both managers have run other businesses in the last 10 years. One business was closed
due to a suspected tax fraud although no case was ever brought to court.
Safe Co’s current auditors provide audit services. Additional assurance on business controls and the
preparation of financial statements are provided by a different accountancy firm.
Last year, a neighbouring farm, Free Co started growing genetically modified (GM) crops, the pollen from
which blows over Safe Co’s fields on a regular basis. This is a threat to Safe Co’s organic status because
organic crops must not be contaminated with GM material. Safe Co is considering court action against Free
Co for loss of income and to stop Free Co growing GM crops.
You are an audit partner in Orange & Co, a 20-partner firm of auditors and business advisors. You have been
friends with the managers of Safe Co for the last 10 years, advising them on an informal basis. The managers
of Safe Co have indicated that the audit will be put out to tender next month and have asked your audit firm
to tender for the audit and the provision of other professional services.
Required:
(a) Using the information provided, identify and explain the ethical threats that could affect
Orange & Co.
(8 marks)
(b) In respect of the going concern concept:
(i) Define ‘going concern’ and state two situations in which it should NOT be applied in the
preparation of financial statements;
(3 marks)
(ii) Explain the directors’ responsibilities and the auditors’ responsibilities regarding financial
statements prepared on the going concern principle.
(4 marks)
(c) List the audit procedures that should be carried out to determine whether or not the going
concern basis is appropriate for Free Co.
(5 marks)
(Total: 20 marks)
Question 17
You are an audit supervisor of Oywind & Co, planning the final audit of a new client, Ticha Construction
Co, for the year ending 30 September 2021. The company specialises in property construction and
providing ongoing annual maintenance services for properties previously constructed. Forecast profit
before tax is $13·8m and total assets are expected to be $22·3m, both of which are higher than for the year
ended 30 September 2020.You are required to produce the audit strategy document. The audit manager has
met with Ticha Construction Co’s finance director and has provided you with the following notes, a copy
of the August management accounts and the prior year financial statements.
Meeting notes
The prior year financial statements recognise work in progress of $1·8m, which was comprised of property
construction in progress as well as ongoing maintenance services for finished properties. The August 2021
management accounts recognise $2·1m inventory of completed properties compared to a balance of $1·4m in
September 2020. A full year-end inventory count will be undertaken on 30 September at all of the 11 building
sites where construction is in progress. There is not sufficient audit team resource to attend all inventory counts.
In line with industry practice, Ticha Construction Co offers its customers a five-year building warranty, which
covers any construction defects. Customers are not required to pay any additional fees to obtain the warranty.
The finance director anticipates this provision will be lower than last year as the company has improved its
building practices and therefore the quality of the finished properties.
Customers who wish to purchase a property are required to place an order and pay a 5% non-refundable deposit
prior to the completion of the building. When the building is complete, customers pay a further 92·5%, with
the final 2·5% due to be paid six months later. The finance director has informed you that although an allowance
for receivables has historically been maintained, it is anticipated that this can be significantly reduced.
Information from management accounts
Ticha Construction Co’s prior year financial statements and August 2021 management accounts contain a
material overdraft balance. The finance director has confirmed that there are minimum profit and net assets
covenants attached to the overdraft.
A review of the management accounts shows the payables period was 56 days for August 2021, compared to
87 days for September 2020. The finance director anticipates that the September 2021 payables days will be
even lower than those in August 2021.

Required:
(a) Describe the process Oywind & Co should have undertaken to assess whether the
PRECONDITIONS for an audit were present when accepting the audit of Ticha
Construction Co.
(5 marks)
(b) Identify THREE main areas, other than audit risks, which should be included within the
audit strategy document for Ticha Construction Co, and for each area provide an example
relevant to the audit.
(3 marks)
(c) Using all the information provided describe EIGHT audit risks, and explain the auditor’s
response to each risk, in planning the audit of Ticha Construction Co.
( 16 marks)
You are the audit manager in Blue & Co. You are currently assigned to a new audit client; Sodume Co.
Sodume Co has a year end of 31 March 2021. The draft financial statements show total assets of $15
million and profit before tax of $3 million. The following matters have been brought to your attention:

Depreciation
Depreciation has not been provided on any non-current asset for a number of years. When asked why no
depreciation is charged, the finance director gave the following response:
‘Property prices generally increase over time so we don’t depreciate buildings. Anyhow, if we had the
buildings revalued, we would need to constantly amend the depreciation calculation to reflect the new
valuation so it’s easier and less time consuming not to bother with it at all. Other assets are not as significant
in value and we usually sell them rather than scrap them so the losses on disposal are minimal and that’s
why we don’t bother depreciating those. Our previous auditors never questioned our approach so it can’t be
that much of a problem.’

Company restructure
At a meeting in March 2021, the board approved the closure of a manufacturing site as part of a company
restructure. The cost of the restructure is expected to be $1 million. The restructure was announced to
employees in April 2021.

Inventory
Blue & Co were appointed auditors after the end of the financial year of Sodume Co.Consequently, the
auditors could not attend the year-end inventory count. Inventory is included the financial statements at a
value of $700,000. The audit work is almost complete and the auditor’s report is due to be signed next week.
The auditor has concluded that there are no material misstatements in respect of the company restructure and
inventory, and sufficient and appropriate evidence has been obtained in respect of both of these matters. The
audit conclusion in respect of depreciation is that depreciation of $2.5 million should have been charged on
assets held by Sodume Co, $0.5 million depreciation in respect of the current year, and $2 million in respect
of previous years.

Required:
(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue
remain unresolved.
(6 marks)
(Total: 30 marks)
Question 18
You are the senior in charge of the audit of Bravos, a high-end clothing line with shops spread all over the
country. To assist you in your audit planning, you have divided areas of financial statements among team
members and instructed them to prepare detailed narratives explaining transaction cycles instead of previously
used flowcharts. The following narrative was prepared for purchases:

Branch managers must fill a standardized purchase requisition form when they feel that stock needs to be
replenished however there is no pre-decided stock reorder level as branch managers feel that demand differs in
different areas. Branch managers do not require advise from Sales managers at branches to raise the purchase
requisitions.

Purchase requisitions are then sent directly to the procurement department in order to ensure that stock is received
without delay. Purchase ledger clerks fill out order forms and quantities on orders are matched with the purchase
requisition to ensure that correct order is placed. The Procurement Director approves all order forms in excess
of $5,000 however forms for lower amounts are forwarded to suppliers to expedite the purchase process.

Upon receipt, the clothes are physically checked for quantity and quality by the warehouse supervisor who then
signs the sequentially numbered GRN and forwards it to relevant departments. When the supplier’s invoice is
received, the purchase ledger clerk checks the calculations on it, initials it and staples the requisition and purchase
order to it. Accounts department accumulates invoices on a weekly basis filing invoices according to dates.
Accounts staff then enters invoices on to the accounting software at the end of the week. Taking care to stamp
invoices once they are entered.

Supplier statements are received on a monthly basis but not reconciled regularly with the ledger as there are
usually no discrepancies and the Accounts Manager does not feel the need. Payment is usually made by bank
transfer but payment is sometimes made in cash to smaller suppliers where the amount to be paid is not
significant.

Required:
(a) Define control environment and list any TWO factors an auditor should consider when evaluating the
control environment of an organization.
(2 marks)
(b) Identify and explain SEVEN deficiencies in Bravos’s internal controls and provide a recommendation to
address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and Control recommendation
respectively.
(14 marks)
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to the completeness of Payables of Bravos at year- end.
(4 marks)
(Total: 20 marks)

End of Question Paper