Name: ...................................................

Student Number: .................................

Signature:.............................................

THE UNIVERSITY OF
NEW SOUTH WALES

School of Accounting
ACCT5908 – Auditing and Assurance Services

FINAL EXAMINATION

Session 1 - 2015

1. Time allowed: 2 hours

2. Number of questions: The exam is divided into two parts.
PART A consists of 13 multiple choice questions
worth 1 mark each, in total 13 marks.
PART B is worth 42 marks and consists of four
written answer questions. (Note that the questions are
NOT of equal value)
3. Total exam: 55 Marks (represents 55% of final assessment)

All questions are compulsory.

Multiple choice questions are to be answered on the answer sheet. Written
questions are to be answered in the spaces provided on this exam paper.

THIS PAPER MAY NOT BE RETAINED BY THE CANDIDATE.

ANSWERS MUST BE WRITTEN IN INK.
EXCEPT WHERE THEY ARE EXPRESSLY REQUIRED, PENCILS MAY BE
USED ONLY FOR DRAWING, SKETCHING OR GRAPHICAL WORK.
  

PART A
MULTIPLE CHOICE QUESTIONS (total of 13 marks)
This question contains thirteen (13) multiple choice questions each worth one (1)
mark.
• A separate answer sheet is provided.
• Carefully read the instructions as provided.
• Indicate the most correct response in the spaces provided.
• Please ensure you fill in your Student Number and Student Name correctly
on your answer sheet.
• No marks are deducted for an incorrect response.

1. Which of the following statements about review engagements of half yearly

financial statements for a public company is true?
a) The Corporations Act (2001) requires half-yearly financial statements
to be reviewed.
b) A review expresses a conclusion, rather than an opinion, on whether
the financial statements are true and fair.
c) The auditor is not required to reach a conclusion about whether the
financial statements are in accordance with accounting standards.
d) The Corporations Act (2001) does not mandate that half-yearly
financial statements are reviewed or audited.

2. Assume as auditor you are being sued by the creditors of your audit client on
the basis of negligence. Upon which of the following legal precedents would
you instruct your lawyers to argue your case:
a) AWA.
b) Esanda.
c) Columbia Coffee.
d) The Corporations Act (2001).

3. Audit services provide economic benefits to society because:

a) The auditor is independent of the company they are auditing.
b) An efficient audit will reduce agency costs by more than the cost of the
audit.
c) It allows high quality managers to prove that the reported profit is not
the result of financial manipulation and therefore they can distinguish
themselves from average managers.
d) All of the above.

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4. Which of the following statements about auditing of the federal public sector,
by the Auditor General, is true?
a) The Auditor General has a mandate to audit the entire federal public
service.
b) The board of directors of the Australian National Audit Office appoints
the Auditor General.
c) The Auditor General does not have to follow Australian Auditing
Standards, as they only apply to audits of public companies.
d) The Auditor General does not perform financial statement audits of
federal government departments, as they do not prepare separate
financial statements.

5. ABC Bank Ltd has excellent controls over bad debts but due to the recent
economic downturn, you have assessed the business risk over this account to
be high. Which audit strategy should you adopt?
a) Many tests of controls, many substantive analytical procedures and no
tests of details.
b) Few tests of controls, no substantive analytical procedure and lots of
tests of details.
c) Many tests of controls, no substantive analytical procedures and few
tests of details.
d) Few tests of controls, lots of analytical procedures and few tests of
details.

6. ASA 240: The Auditor's Responsibilities Relating to Fraud in an Audit of a

Financial Report requires the auditor to do which of the following?
a) To add an emphasis of matter paragraph to the audit report to state
that fraud has occurred, even if the financial statements are true and
fair and the fraud has ceased.
b) To maintain professional scepticism about the possibility of fraud, even
if the company has no history of fraud and the management are
trustworthy.
c) To report all material fraud to ASIC.
d) To require the auditor to only accept an audit client if the directors
indemnify the auditor against fraud litigation costs in the engagement
letter.

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Use the following information to answer questions 7 – 9

Hipster Organic Coffee Roasters Ltd (HOCR) imports, roasts, packages and sells
coffee beans to cafes from a factory in Alexandria. The company CEO is Sam
Jenkins and there are fifteen other employees. Eight people are employed to roast
and pack the beans and four drivers to deliver them. There are three accounts
clerks. Their names and responsibilities are:
• Craig Fleming – responsible for inventory management and for organising
deliveries,
• Kirsten Tarrant – responsible for taking customer orders, recording sales,
accounts receivable and cash receipts,
• Richard Shearer – responsible for purchases, accounts payable and cash
payments.

When Kirsten receives an order from a retail store, she checks with Craig to see if
the item is in the warehouse. If it is in the warehouse, Craig generates a dispatch
note and updates the inventory records. He gives the dispatch note to a driver, who
takes the inventory from the warehouse and makes the delivery. Once the delivery
has been made, the driver confirms the quantity of inventory that was actually
delivered to the customer. When he returns, he gives the dispatch note to Kirsten
who then records the transaction in the sales journal. In addition, Craig reviews the
inventory records daily and asks the coffee roasters to make new batches of any
items that have low stock levels.

At the end of each month, Kirsten sends statements to all customers with
outstanding account balances. Payments are required within 30 days. When a
customer pays, Kirsten banks the money and updates the accounts receivable
ledger. If payments are not made within this time, Kirsten contacts the customer by
phone and letter to try and get them to pay. If payment still hasn’t been made after
60 days, Kirsten writes off the debt. When the monthly bank statement is received,
Kirsten reconciles it to the ledger and corrects any errors.

The CEO, Sam Jenkins, has a great deal of trust in the accounts clerks and largely
leaves them to carry out the accounting functions unsupervised. Her main concerns
are that the company is able to meet all orders rapidly and that the suppliers are paid
on time. Provided that neither the customers nor the suppliers are complaining and
there is enough cash to meet ongoing costs and pay staff, she assumes the
accounting functions are being carried out effectively.

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7. Which of the following is not a control weakness?

a) Having the driver fill out the details of the delivery on the dispatch note
and then give it to Kirsten.
b) The bad debt follow-up and write off procedure used by Kirsten.
c) Craig’s procedures to avoid inventory overproduction.
d) Sam’s oversight of the accounting function.

8. Which of the following items would most improve the level of control at
HOCR?
a) Having Richard Shearer do the bank reconciliations.
b) Having Sam Jenkins check and sign the customer statements before
Kirsten sends them out.
c) Having Kirsten Tarrant take over inventory management duties from
Craig Fleming.
d) Having Sam Jenkins approve all bad debt write-offs before Kirsten
makes them.

9. The control weaknesses at HOCR are most likely to affect which account and
assertion
a) Existence of Inventory.
b) Valuation and Allocation of Inventory.
c) Completeness of Cash.
d) Accuracy of Sales.

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10. An auditor is only required to find fraud at a client if?

a) The fraud is material.
b) The auditor has assessed the integrity of the board of directors as
being poor.
c) The fraud is of an extent that it could affect the going concern
assumption.
d) The fraud has been conducted by directors or senior managers.

11. Which of the following statements about greenhouse gas (GHG) auditing is
true?
a) The Clean Energy Regulator (CER) selects auditors to perform pre-
submission audits of company GHG disclosures.
b) Accounting firms must appoint external engineering experts to conduct
audits of scope 1 GHG emissions, which have been measured by the
direct measurement method, as accountants lack the scientific and
technical skills to do so.
c) There is no government requirement for pre-submission audits of GHG
emissions.
d) Direct measurement is the only legal method of measuring scope 1
GHG emissions.

12. Before an external auditor can rely on the internal control testing performed by
the internal auditors, the external auditor must assess which of the following
items?
a) The level of competence of the internal audit function.
b) Whether the internal audit function applies a systematic and disciplined
approach, including quality control.
c) The extent to which the internal audit function’s organisational status
and relevant policies and procedures support the objectivity of the
internal auditors.
d) All of the above.

13. Audit partner rotation, for public companies, is required by:

a) The Big-4 accounting firms.
b) The AUASB.
c) The CALDB.
d) The Corporations Act (2001).

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PART B

Question One (total 22 marks)

Your audit client, Norse Scandinavian Furniture Limited (“Norse”) is an Australian

based importer of high quality hand-made Scandinavian timber furniture, which it
sells through boutique retail stores in Australia’s major cities. It also provides
furniture directly to major corporate customers. It buys most of its furniture through
Roskilde Eksport Møbler Selskab (REMS), a Danish exporter, who sources the
furniture from a number of small family owned firms in Denmark and Sweden. As
part of your audit planning for the year ended 31st May 2015, you have received the
following information from the company:

2015 2014
(Unaudited) (Audited)

Sales $11.8m $17.3m

Net Profit $0.9m $2.5m
Cash at Bank $0.5m $1.9m
Inventory $0.2m $1.3m
Accounts Receivable $2.2m $1.5m
Accounts Payable $1.3m $0.3m
Provision for Legal Liability $0.1m $0.1m
Borrowings $8.0m $2.0m

As part of your audit planning process you have gathered the following additional
information:

i. During the year the Australian Dollar has declined by 15% against the US
dollar and did not change relative to the Euro and Danish krone.
ii. An Australian based competitor “Mid-Century Furniture Direct” imports timber
furniture from Brazil and markets it to the same customers targeted by Norse.
Some of the designs bear a close resemblance to Norse’s range, yet are up to
50% cheaper.
iii. On 12th January 2015, the Danish government began an investigation of
REMS for mislabelling furniture made in a factory in Russia as “Hand Made in
Denmark”. While this investigation is being undertaken, REMS has been
banned from selling its existing inventory.
iv. Shortages of furniture, caused by the REMS sales ban, have resulted in
Norse not being able to fulfil a contract to provide furniture for the new 120
room, five star, Excelsior Hotel, which is due to open at Darling Harbour on 3rd
July 2015.
v. Norse attempted to negotiate a $10m loan with the Commonwealth Bank, to
refinance its maturing debt, but the bank would only lend them $8 million.
vi. On 3rd June 2015 Norse announced that it will be closing its store in Perth
when its lease expires on 30th September 2015, due to a large increase in
rent and falling sales.

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vii. On 12th June 2015, the Fair Work Commission began an investigation of
Norse for allegedly underpaying the truck drivers who deliver the company’s
furniture. Norse has denied any wrongdoing and has claimed that the
investigation was instigated by a trade union representative after he received
a bad annual performance review.

Part One (15 marks)

Required:

From the available information describe five (5) significant audit risks. For each risk
you should also indicate the key account and key assertion at risk, and provide a
specific and practical test of detail that you would use to gather audit evidence in
respect of the risk.

Risk (i):

Explanation of risk (1 mark):

Account (0.5 marks):

Assertion (0.5 marks):

Test of Detail (1 mark):

   

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Risk (ii):

Explanation of risk (1 mark):

Account (0.5 marks):

Assertion (0.5 marks):

Test of Detail (1 mark):

   

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Risk (iii):

Explanation of risk (1 mark):

Account (0.5 marks):

Assertion (0.5 marks):

Test of Detail (1 mark):

   

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Risk (iv):

Explanation of risk (1 mark):

Account (0.5 marks):

Assertion (0.5 marks):

Test of Detail (1 mark):

   

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Risk (v):

Explanation of risk (1 mark):

Account (0.5 marks):

Assertion (0.5 marks):

Test of Detail (1 mark):

   

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Part Two (7 marks)

(i) Outline the reasons you might need to rely on the work of an expert to assist
you with your audit of Norse. Identify the type of expert required and justify
your response.
[2 marks]

Type of Expert:

Justification:

(ii) Outline the matters you will need to consider when appointing an expert to
assist you with your audit.
[2 marks]

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(iii) What would you consider to be an appropriate base and reasonable level of
planning materiality for this client? Justify your answer?
[3 marks]

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Question Two (total of 8 marks)

For each of the four independent situations described below, indicate the audit report
the auditor should issue and provide justification for your answer. Note, except for
the matters discussed in each question, assume that the financial statements
present a true and fair view.

(a) Due to the failure of a major customer five days after the balance date, you
have determined that it is highly unlikely that your client will be able to
continue in business as a going concern for a period of 12 months after
reporting date. The client has agreed to disclose this fact in the directors’
declaration.
[2 marks]

Opinion (1 mark):

Justification (1 mark):

(b) Your audit client has decided against disclosure of employee long service
leave entitlements information – as required by AASB 119 Employee Benefits
– in the notes to the financial statements, on the basis that doing so will result
in financial statements that do not present a true and fair view and that the
information cannot be disclosed due to confidentially agreements in
employment contracts.
[2 marks]

Opinion (1 mark):

Justification (1 mark):

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(c) Due to a computer system failure in your client’s purchases/accounts payable

system, it was impossible for your GAS to access the files and automatically
generate a list of creditors for supplier confirmations. This forced you to use
subsequent payments testing instead. Accounts payable is a very significant
account for your client and they have a strong positive cashflow and a history
of paying suppliers on time.
[2 marks]

Opinion (1 mark):

Justification (1 mark):

 
(d) JKL Ltd is an Australian pharmaceutical company that has developed a new
drug to treat Alzheimer’s disease, called Memocure. A competitor, Global
Pharmaceuticals Inc., has recently launched a new Alzheimer’s drug called
Remcal, which has been a huge success on the international market. JKL is
suing Global Pharmaceuticals because it believes that Remcal is so similar to
Memocure that it violates JKL’s patent. JKL’s Lawyers believe that they have
a good chance of winning the case. If they succeed, JKL will receive a very
large amount of compensation that will more than double their profits for the
next five years. This information has been adequately disclosed in the
financial statements.
[2 marks]

Opinion (1 mark):

Justification (1 mark):

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Question Three (total of 7 marks)

ABC Ltd stores its supplier, purchases, payments and inventory records in the
following tables.

Suppliers Table:
Field Data
10 Supplier Number
11 Supplier Name
12 Supplier Address
13 Supplier Phone Number

Purchase Orders Table:

Field Data
20 Purchase Order Number
21 Supplier Number
22 Item Number
23 Number of Items
24 Cost per Item
25 Freight Charges
26 Date Ordered
27 Date Received

Cash Payments Table:

Field Data
30 Payment Number
31 Supplier Number
32 Amount
33 Date

Inventory Table:
Field Data
40 Item Number
41 Supplier Number
42 Item Description
43 Quantity on Hand

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(i) Which computerised input control can be used to prevent the following errors
from occurring. State the control, the field it will be applied to and the account
and assertion it will affect.
[3 marks]

A payment being entered for a supplier that does not exist: (1 mark)

The creation of a purchase order for the wrong supplier: (1 mark)

The omission of an item description when a new item of inventory is added to

the Inventory Table: (1 mark)

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(ii) For one of the controls you have stated in Section (i), describe one specific
test of control that would allow you to determine if the control is working.
[1 mark]

(iii) Which reports would you get GAS to generate to help you test each of the
following assertions? List the exact fields that will be in the report and how
you would use the report to help you test the assertion.
[3 marks]

Occurrence of purchases: (1.5 marks)

Existence of inventory: (1.5 marks)

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Question Four (total of 5 marks)

Part One (1 mark)

Explain why objectivity is a fundamental characteristic of an auditor, as required by

APES 110.

Part Two (4 marks)

For each of the following situations, state which threat to independence (as stated in
APES 110) may be occurring and justify your answer.

i) The Federal Government’s new “Direct Action” carbon abatement scheme

provides government funding to encourage polluters to reduce their
emissions. Your audit client, Phoebe Ltd, (Phoebe) is keen to access this
funding to assist in the cost of replacement of its aging plant. Phoebe has
asked you to support their application to the government advisory panel which
determines which carbon abatement schemes receive funding.
[2 marks]

Threat to Independence:

Justification:

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ii) Your client, BigBucks Ltd, (BBL) operates a casino in Brisbane. BBL has
approached you, their auditor, encouraging you to increase your audit fee by
25% in exchange for a guarantee from you that you will provide an unqualified
audit opinion, irrespective of the actual findings on your forthcoming audit.
[2 marks]

Threat to Independence:

Justification:

END OF EXAM

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