Mock -AA
20 May 2025 09:20
Section A (30 marks)
(INTERNAL CONTROL, CONTROL ENVIORNMENT)
This scenario relates to six requirements.
It is 1 July 20X5. You are an audit supervisor with Flinda & Co and you are working on the audit of Granstan Co, which sells electronic kitchen appliances from 40 stores across the
country. You are reviewing documentation provided by the finance director of Granstan Co, including extracts of the company’s system of internal control, in advance of the interim
audit for the year ending 30 September 20X5. Although the website, payroll and inventory systems are stand -alone, the sales and purchases modules are fully integrated into the
computerised accounting system.
Sales
Granstan Co has both business and retail customers. Business customers can apply for a credit account through Granstan Co’s c entral credit control department. After performing
necessary checks, the credit control department sets a credit limit which is authorised and then regularly reviewed by the fi nance director. As well as purchasing in store, business
customers can purchase goods via the company’s website and collect them from their nearest store or have them delivered. As p art of the invoicing process, a member of the finance
team matches the details on the online order with the goods dispatched note (GDN) before the sales invoice is raised based on these documents.
Each store charges the same prices for goods but customers who are on the mailing list receive weekly emails with discount of fers. To claim the discount customers must show this
email at the cash tills (cash registers) and have the discount barcode within the email scanned. The system then deducts the discount from the price charged.
Payroll
Granstan Co has separate human resources (HR) and payroll departments. The HR department is responsible for setting up employ ee records for new employees. As part of this
process an authorised joiner form, including all relevant details, is sent to the payroll department so that the new employee s can be added to the payroll. However, when temporary
employees are required at short notice joiner forms are not completed. Instead, the relevant store manager notifies the payro ll department by email on the day the new employee
starts work.
All permanent employees are paid on a monthly basis by bank transfer. The payroll for each store is passed to the store manag er for review and approval two days before the
payment date. The store manager is required to report back to the payroll department only if any errors are identified. Tempo rary employees are paid in cash and pay packets are
prepared and distributed by the payroll department. When employees collect their pay packets, they are only required to state their name. They then count the cash in the pay packet
and sign for it.
Purchases
Granstan Co has a central purchasing department. A monthly exception report of any changes made to the supplier master file d ata is automatically generated, printed and then filed.
When goods are ordered, a purchase order is generated within the purchase ordering module, authorised by the relevant individ ual and sent to the supplier. The purchasing and
finance departments as well as the stores are able to access the ordering module to view orders.
Goods are delivered directly to the relevant store where a store employee checks the quantity supplied to the supplier’s deli very note and the purchase order. On completion of the
checks, an electronic goods received note (GRN) is produced. Only the stores and the finance department have access rights to view the completed GRNs within the module.
Due to staff shortages in the finance department, supplier statement reconciliations are no longer performed.
30 MARKS
1. DESCRIBE THE FIVE COMPONENTS OF AN ENTITIES SYSTEM CONTROL
COMPONENTS DESCRIPTION
CONTROL ENVIORNMENT
ENTITIES RISK ASSESMENT PROCESS
ENTITIES PROCESS TO MONTIOR THE SYSTEM OF INTERNAL CONTROL
INFORMATION SYSTEM AND COMMUNICATION
CONTROL ACTIVITIES
2. IDENTIFY AND EXPLAIN THREE DIRECT CONTROLS IN REGARDS OF SALES SYSTEM
3. DESCRIBE THE TEST OF CONTROLS TO TEST THESE CONTROLS TO VERIFY THE EFFECTIVNESS OF THE DIRECT CONTROLS
4. IN TERMS OF PAYROLL AND PURCHASE SYSTEM- IDENTIFY & EXPLAIN FIVE DEFICIENCIES AND SUGGEST CONTROL RECCOMENDATIONS FOR THESE DEFICIENCIES
5. DESCRIBE THE SUBSTATIVE AUDIT PROCEDDURES TO OBTAIN SAAE IN RELATION TO REVENUE
6. DESCRIBE TWO CORPORATE GOVERNANCE DEFICIENCIES AND SUGGEST A RECCOMMENDATION TO ENSURE COMPLIANCE
"The company is actively recruiting independent non-executive directors (NEDs) whose remuneration will include a bonus based on the company’s profits. To ensure that remuneration
is sufficient to attract and retain both NEDs and executive directors, the CEO will perform a market comparison analysis and decide the remuneration of all directors."
SECTION - B - (70 MARKS) ( IDENTIFICATION OF AUDIT RISK & RESPONSE, SUBSTANTIVE PROCEDURES,INTERNAL CONTROL)
1. You are an audit senior of Loganberry & Co and are planning the audit of Blackberry Co for the year ending 31 March 20X8. The company is a manufacturer of portable music
players and your audit manager has already had a planning meeting with the finance director. Forecast revenue is $68.6m and profit before tax is $4.2m.
She has provided you with the following notes of the meeting:
Planning meeting notes
Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of raw materials and costs of conversion, including labour, production and
general overheads. Inventory is held in three warehouses across the country.
The company plans to conduct full inventory counts at the warehouses on 2, 3 and 4 April, and any necessary adjustments will be made to reflect post year-end movements of
inventory. The internal audit team will attend the counts.
During the year, Blackberry Co paid $1.1m to purchase a patent which allows the company the exclusive right for three years t o customise their portable music players to gain a
competitive advantage in their industry. The $1.1m has been expensed in the current year statement of profit or loss. In orde r to finance this purchase, Blackberry Co raised $1.2m
through issuing shares at a premium.
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through issuing shares at a premium.
In November 20X7, it was discovered that a significant teeming and lading fraud had been carried out by four members of the r eceivables ledger department who had colluded. They
had stolen funds from wholesale customer receipts and then to cover this, they allocated later customer receipts against the older receivables. These employees were all reported to
the police and subsequently dismissed. As a result of the vacancies in the receivables ledger department, Blackberry Co decid ed to outsource its receivables ledger processing to an
external service organisation. This service organisation handles all elements of the receivables ledger cycle, including sale s invoicing and chasing of receivables balances and sends
monthly reports to Blackberry Co detailing the sales and receivable amounts. Blackberry Co ran its own receivables ledger unt il 31 January 20X8, at which point the records were
transferred to the service organisation.
In December 20X7, the financial accountant of Blackberry Co was dismissed. He had been employed by the company for nine years , and he has threatened to sue the company for
unfair dismissal. As a result of this dismissal, and until his replacement commences work in April, the financial accountant’s responsibilities have been adequately allocated to other
members of the finance department. However, for this period no supplier statement reconciliations or payables ledger control account reconciliations have been performed.
In January 20X7, a receivable balance of $0.9m was written off by Blackberry Co as it was deemed irrecoverable as the custome r had declared itself bankrupt. In February 20X8, the
liquidators handling the bankruptcy of the company publicly announced that it was likely that most of its creditors would rec eive a pay-out of 40% of the balance owed. As a result,
Blackberry Co has included a current asset of $360,000 within the statement of financial position and other income in the sta tement of profit or loss.
Required:
(a) Describe Loganberry & Co’s responsibilities in relation to the prevention and detection of fraud and error.
(b) Describe EIGHT audit risks and explain the auditor’s response to each risk in planning the audit of Blackberry Co.
2. This scenario relates to four requirements.
You are an audit manager of Cranberry & Co and you are currently responsible for the audit of Gooseberry Co, a company which develops and manufactures health and beauty
products and distributes these to wholesale customers. Its draft profit before tax is $6.4m and total assets are $37.2m for t he financial year ended 31 January 20X8. The final audit is
due to commence shortly and the following matters have been brought to your attention:
Research and development
Gooseberry Co spent $1.9m in the current year developing nine new health and beauty products, all of which are at different s tages of development. Once they meet the recognition
criteria under IAS® 38 Intangible Assets for development expenditure, Gooseberry Co includes the costs incurred within intang ible assets. Once production commences, the intangible
assets are amortised on a straight-line basis over three years.
Management believes that this amortisation policy is a reasonable approximation of the assets’ useful lives, as in this indus try there is constant demand for innovative new products.
Depreciation
Gooseberry Co has a large portfolio of property, plant and equipment (PPE). In March 20X7, the company carried out a full rev iew of all its PPE and updated the useful lives, residual
values, depreciation rates and methods for many categories of asset. The finance director felt the changes were necessary to better reflect the use of the assets. This resulted in the
depreciation charge of some assets changing significantly for this year.
Bonus
The company’s board is comprised of seven directors. They are each entitled to a bonus based on the draft year-end net assets, excluding intangible assets. Details of the bonus
entitlement are included in the directors’ service contracts.
The bonus, which related to the 20X8 year end, was paid to each director in February 20X8 and the costs were accrued and reco gnised within wages and salaries for the year ended 31
January 20X8. Separate disclosure of the bonus, by director, is required by local legislation.
Required:
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relatio n to Gooseberry Co’s research and development
expenditure.
(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relatio n to the matters identified regarding depreciation of
property, plant and equipment.
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relatio n to the directors’ bonuses.
During the audit, the team discovers that the intangible assets balance includes $440,000 related to one of the nine new heal th and beauty products development projects, which
does not meet the criteria for capitalisation. As this project is ongoing, the finance director has suggested that no adjustm ent is made in the 20X8 financial statements. She is
confident that the project will meet the criteria for capitalisation in 20X9.
Required:
(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain unresolved.
3. This scenario relates to four requirements.
(a) Auditors are required to document a company’s accounting and internal control systems as part of their audit process. Two methods available for documenting internal
control systems are narrative notes and questionnaires.
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Required:
For each of the two methods, NARRATIVE NOTES and QUESTIONNAIRES:
(i) Describe the method for documenting internal control systems; and
(ii) Explain an ADVANTAGE of using this method.
Freesia Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide range of retailers across the region. The company has an internal audit
unit. A preliminary audit planning meeting for the year to 30 June 20X9 has been carried out and Zinnia & Co, engaged in the draft audit programmes and reviewing extracts
from the internal controls documentation in preparation for the interim audit.
Sales
Freesia Co generates revenue through visits by its sales staff to customers’ premises. Sales ledger clerks, who work at head office, carry out sales credit checks on new
customers using a reputable credit agency and set an authorised credit limit. Sales staff write down customer orders on order forms which are completed using a four-part pre-
printed order form. One copy is retained by the customer and another is sent to the sales department. Once the order is fulfilled, the dispatch team delivers the goods to the
customer and returns a signed delivery note to the sales ledger clerk, who also performs a verification function in order to facilitate invoicing to the customer.
Retail customers are given payment terms of 30 days and most customers choose to pay their invoices by bank transfer. Each day Lily Shah, a finance clerk, posts bank transfers
received from customers to the cash book and updates the sales ledger. On a monthly basis, she performs the bank reconciliation.
Purchases and Inventory
Receipts of raw materials and goods from suppliers are processed by the warehouse team at head office, who agree the delivery to the purchase order, check the quantity and
quality of goods and complete a sequentially numbered goods received note (GRN). The GRNs are sent to the finance department daily. On receipt of the purchase invoice from
the supplier, Carmen Brown, the purchase ledger clerk, matches it to the GRN and order and the three documents are sent for authorisation by the appropriate individual. Once
authorised, the purchase invoices are logged into the purchase ledger. No system, unless document control is in place, controls to ensure that correct number of invoices has
been input.
The company values its inventory using standard costs, both for internal management reporting and for inclusion in the year-end financial statements. The basis of the standard
costs was reviewed approximately 18 months ago.
Payroll
Freesia Co employs a mixture of factory staff, who work a standard shift of eight hours a day, and administration and sales staff who are salaried. All staff are paid monthly by
bank transfer. Occasionally, overtime is required for factory staff. Where this occurs, details are written on overtime claim forms which are authorised by the production
department supervisor and sent to the payroll department by the end of the month. At the end of each quarter, the company’s payroll department sends a report to each
department head showing the amount of overtime worked and the payroll costs incurred.
Freesia Co’s payroll package produces a list of payments per employee which links into the bank system to produce a list of automatic bank transfer payments. The finance
director reviews this printout prior to the list of automatic bank payments being authorised. The total amount of the payroll must be paid for in the month per the payroll
records. If any issues arise, automatic bank transfers can be manually changed by the finance director.
Required:
(b) In respect of the internal controls of Freesia Co:
(i) Identify and explain six deficiencies
(ii) Recommend a control to address each of these deficiencies, and
(iii) Describe a TEST OF CONTROL the external auditors should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified
deficiency.
Note: Prepare your answer using three columns headed: Control deficiency, Control recommendation, and Test of control respectively. The total marks will be split equally
between each part.
Freesia Co deducts employment taxes from its employees’ wages and salaries on a monthly basis and pays these to the local taxation authorities in the following month. At the
year end, the financial statements will contain an accrual for employment tax payable.
Required:
(c) Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in res pect of Freesia Co’s year-end accrual for
employment tax payable.
The listing rules of the stock exchange require compliance with corporate governance principles and the directors of Freesia Co are confident that they are following best
practice in relation to this. However, the early reviewer received correspondence from a shareholder who is concerned that the company is not fully compliant. The company’s
finance director has therefore requested a review of the company’s compliance with corporate governance principles.
Freesia Co has been listed for over eight years and its board comprises four executive and four independent non-executive directors (NEDs), excluding the chair. An audit
committee comprised of the NEDs and the finance director meets each quarter to review the company’s internal controls.
The directors’ remuneration is set by the finance director. NEDs are paid a fixed fee for their services and executive directors are paid an annual salary and receive a bonus
based on hours worked and on Freesia Co’s profits. The company’s chair does not have an executive role and she has been solely responsible for liaising with the shareholders
and answering all shareholder questions.
Required:
(d) Describe TWO corporate governance weaknesses faced by Freesia Co and provide a recommendation to address each weakness to ensure compliance with corporate
governance principles.
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