Beruflich Dokumente
Kultur Dokumente
(2 hours)
1. Ensure your candidate details are on the front of your answer booklet.
Short-form Questions (1 6)
3. Answer the short-form questions in note form only. Complete sentences are not
required.
4. Answers to each short-form question must begin on a new page and must be submitted
in numerical order.
5. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.
6. The examiner will take account of the way in which answers are presented.
IMPORTANT
Question papers contain confidential Place your label here. If you do not have a label
information and must NOT be removed you MUST enter your candidate number in this
from the examination hall. box.
State your firms responsibilities in relation to Charns request, as set out in the ICAEW Code
of Ethics. (3 marks)
2. Your firm has been informed by Tumnus plc, a listed company, that it will not be reappointed
as external auditor at the end of its term of office.
State your firms rights and responsibilities, under the Companies Act 2006, in this situation.
(2 marks)
3. Your firm has been invited to tender for an engagement to review and report on the internal
control system in place for recording sales at Jadis Ltd (Jadis). Jadis operates a chain of
coffee shops in the UK. Your firm is not the external auditor of Jadis.
Identify the factors that will influence the engagement fee that your firm will propose in its
tender document. (4 marks)
4. You are the supervisor on the external audit of Plummer Ltd (Plummer) for the year ended
31 December 2011. Whilst performing the planned audit procedures in the week
commencing 12 March 2012, the audit team noted the following issues in the schedule of
unadjusted errors:
(i) The balance on a trade receivable account, totalling 435,000, remains unpaid and is
in dispute. No allowance against the receivable has been made.
(ii) Goods despatched and delivered to a customer on 2 January 2012 were included at
260,000 in both revenue and trade receivables at 31 December 2011. A member of
the engagement team attended the year-end inventory count and obtained a copy of
the count records.
The draft financial statements of Plummer for the year ended 31 December 2011 show profit
before tax of 11.3 million.
Explain why further audit procedures are required and, for each of the issues, identify one
relevant audit procedure to address the issue noted. (4 marks)
5. List the differences between a report prepared by a practitioner for an engagement to review
financial statements and the report prepared by auditors for an external audit engagement.
(3 marks)
Prepare notes, in readiness for drafting your firms report to the management of Dawn, which
outline the possible consequences of this significant internal control deficiency and provide
recommendations to remedy the deficiency. (4 marks)
Paravel operates a chain of 45 retail garden centres throughout the UK, supplying customers
with trees and plants as well as related gardening products such as lawn mowers, tools and
pesticides. Customers pay for purchases using cash or debit/credit cards. The business has
been highly successful due to the popularity of gardening in the UK and, in August 2011, the
directors commenced a programme of building works to increase the size of its garden
centres.
As a result of the highly seasonal nature of the business, the directors obtained a bank loan
on 31 October 2011 to ensure sufficient cash was available to continue the building works
during the winter months, November 2011 to March 2012. The bank loan is repayable over
three years with interest payable quarterly in arrears. Part of the loan was also used to make
a lump-sum payment of 2 million to Miraz Events Ltd (Miraz) for a two-year sponsorship
deal. Miraz organises gardening shows in the UK and invited Paravel to become its lead
sponsor for all shows for the two years ending 31 December 2013. Paravels brand will be
used by Miraz when promoting its gardening shows throughout the sponsorship period.
Employees at each garden centre include permanent gardening staff, who maintain the trees
and plants available for sale, and permanent retail and customer services staff. In addition, a
large number of temporary staff are employed between April and September due to the
increased volume of sales in this period.
Plants and trees are purchased, ready for sale, from a variety of specialist suppliers in the UK
and overseas. Overseas suppliers invoice Paravel in their local currency. Paravel requires a
licence to import plants and trees into the UK and is regularly inspected by the licensing
authority to ensure that it is complying with the terms of the licence. Paravel plans to
undertake a full inventory count at each garden centre on 31 March 2012.
The engagement partner has provided you with the following extracts from the financial
statements for the full year to 31 March:
2012 2011
(estimated) (audited)
000 000
Income statement
Revenue 156,960 116,888
Cost of sales (99,544) (81,822)
Gross profit 57,416 35,066
Current liabilities
Trade payables 8,434 8,141
Paravels finance director, Edmund Lewis, has proposed, in respect of this engagement, that:
(i) the responsibilities of your firm include making recommendations to the directors as to
how best to prepare and present the profit and cash flow forecasts to increase the
likelihood of the bank agreeing to Paravels application; and
(ii) your firms fee for the examination of and report on the profit and cash flow forecasts will
only be paid once the bank agrees to provide the finance to Paravel with no fee payable
should Paravels bank decline the new loan application.
If the loan is approved by the bank, Paravel will invest the funds in refrigeration units and
shelving in each garden centre and in an initial purchase of inventories of gourmet foods and
gifts. In addition, an upgrade to the computerised tills at each garden centre will be performed
by Caspian Ltd, Paravels technology provider. As the upgrade represents an enhancement
to the current tills, the directors propose to include the cost of the upgrade as an addition to
computer equipment within non-current assets.
Requirements
(a) From the information provided, identify the areas of audit risk in respect of the financial
statements of Paravel for the year ending 31 March 2012. For each audit risk explain
the factors which have led you to identify that risk. (20 marks)
(b) From the information provided, identify the key receipts and payments that you would
expect to be included in the cash flow forecast prepared by the directors of Paravel in
respect of the diversification plans for the three years ending 31 March 2015. For each
key receipt and payment, identify the specific matters you would consider when
reviewing the reasonableness of the assumptions in forecasting that receipt or payment.
(10 marks)
(c) State the key differences you would expect to see between the items included in the
profit forecasts and the receipts and payments included in the cash flow forecasts
prepared by the directors of Paravel. (4 marks)
(d) Explain the professional issues for your firm raised by Edmunds proposals in (i) and (ii).
(6 marks)
(40 marks)
Requirements
(a) Describe the role of the ethics partner within an external audit firm. (3 marks)
(b) Identify and explain the principal threats to objectivity presented by each of the three
situations above. Your answer should list, with reasons, any additional information the
ethics partner should consider before reaching a conclusion on each situation and state
how your firm should mitigate the threats identified. (14 marks)
(c) Outline the quality control procedures that an audit firm should adopt in order to provide
it with reasonable assurance that its personnel, undertaking audit engagements,
maintain independence. (3 marks)
(20 marks)
Requirements
(a) In relation to the situations identified above, explain the potential implications for your
firms audit opinions on the financial statements of each of Puzzle and Shift if the
directors
Your answer should describe the effects, if any, on each of your firms audit reports.
(10 marks)
(b) Outline the specific implications for your firms audit report assuming the directors of
Puzzle had instead based their assessment of the appropriateness of the going concern
presumption on financial forecasts for the six months ending 30 June 2012. (5 marks)
(c) Explain why the audit of related party transactions, such as that between Shift and
Battle, is a challenging area for external auditors. (5 marks)
(20 marks)