AAA316

Main exam questions

&
Main exam suggested solutions
 Audit & Assurance (3) 2016 (AAA)

Main exam
14 December 2016

Time allowed – Three hours

(plus 15 minutes reading time)

This open-book exam contains four (4) short-answer questions to a

total of 80 marks

This paper contains 14 pages (including this page) (over to page 2)

Copyright © Chartered Accountants Australia and New Zealand 2016. All rights reserved.
This publication is copyright. Apart from any use as permitted under the Copyright Act 1968 (Australia) and Copyright Act 1994 (New Zealand),
as applicable, it may not be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part,
in any form or by any means, without the prior written consent of Chartered Accountants Australia and New Zealand.
Audit & Assurance Chartered Accountants Program

Announcements

Where a question refers to or requires candidates to provide a reference to a Standard,

candidates can use International Standards, Australian Standards or New Zealand
Standards.
Candidates must use the assertions contained in ISA  315 (Revised) Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment para. A124 (or national equivalent) in the exam.

Question 1 begins on the next page, please turn over

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Chartered Accountants Program Audit & Assurance

Question 1 (20 marks)

Background
As a high performing audit senior within professional services firm A1 Services (A1), you have
recently been assigned as the senior auditor on the upcoming audit engagement of Cryptag
Limited (Cryptag), a listed, profit-oriented entity that designs and manufactures access systems
for buildings and offices. Cryptag has a 31 December year end. The company has been an audit
client of A1 for four years.
The engagement partner, Megan, is very keen for you to get up to speed with the client and
has emphasised that an in-depth understanding of the entity and its industry helps identify the
issues that will impact the audit.
It is now 1 December 20X6. At Megan’s request, you have commenced planning for the
upcoming engagement, the 31 December 20X6 year-end audit of Cryptag. Based on
conversations with Megan and having read the prior year financial statements, you have some
understanding of the entity, its environment and its performance. You have been tasked to
spend a few days at the client site to undertake some preliminary procedures to help with risk
assessment, and to finalise the overall audit strategy.
The chief financial officer (CFO) of Cryptag is busy preparing for the financial year end but has
kindly provided you with the following information at your request:
•• Minutes of the board meetings for the current financial year (August and October 20X6)
(Attachment 1).
(Please note that minutes of board meetings for the six months to 30 June 20X6 were
reviewed as part of the half-year review.)
•• Extract from the profit and loss account for the nine months ending 30 September 20X6
(Attachment 2).

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Audit & Assurance Chartered Accountants Program

Question 1 (cont.)

Attachment 1
Date: 11 August 20X6
Board meeting: Minutes
Attendees: Chairman, CEO, CFO, company secretary, non-executive director X, non-
executive director Y
•• Results to 31 July 20X6 are slightly behind budget, with revenue of $4.9 million and net
margin of 13%.
•• The half year financial statements were approved and released with an unmodified
conclusion from the auditors. The audit partner Megan Harris presented their report to the
audit and risk committee (ARC).
•• Megan highlighted that the assumptions used in our discounted cash flow model to support
valuation of assets were relatively aggressive compared to industry averages.
•• Recruitment for a new payroll manager has yet to commence following the retirement
of Helen Avery in July. The finance manager, Joel McCarthy, continues to absorb payroll
manager responsibilities.
•• Management propose to put the 20X7 financial statement audit out for tender.
•• A long-standing customer, Rent and Run Pty Ltd (Rent and Run), officially went into
administration on 31 July 20X6, with a balance owing of $103,000 as at 31 July. Rent and Run
has assured us that it will make the payment within 30 days from this date.
•• No debtor balances owing outside of credit terms (45 days).
•• Next board meeting scheduled for Thursday 7 October 20X6.

Date: 7 October 20X6

Board Meeting: Minutes
Attendees: Chairman, CEO, CFO, company secretary, non-executive director X,
non‑executive director Y
•• Results to 30 September 20X6 remain behind budget, with revenue of $6.3 million and net
margin of 11%.
•• The existing contract with Off1ces Limited currently generating $650,000 revenue annually
is up for renewal in March 20X7.
•• The proposed fee from the auditors for the year-end audit is 15% higher than it was last
year reflective of both consumer price index (CPI) and a history of additional audit effort
required to ensure appropriate financial statement disclosures and correction of a number
of identified misstatements.
•• Assumptions used in the discounted cash flow model for purposes of asset impairment
testing have not changed since half-year to 30 June 20X6.
•• A new payroll manager will commence employment on Tuesday 27 December 20X6, taking
responsibility for year-end reconciliations, allowing Joel to focus on finance manager
responsibilities.
•• One overdue debtor balance of $103,000.
•• Audit fieldwork due to commence Wednesday 4 January 20X7.
•• Signing and release of financial statements Friday 20 January 20X7.
•• Next board meeting scheduled for Thursday 19 January 20X7.

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Chartered Accountants Program Audit & Assurance

Question 1 (cont.)

Attachment 2
Management accounts to 30 September 20X6
Profit and loss account for 9 months ending 30 September 20X6 (extract)
Revenue: $6.3 million
Cost of sales: $4.4 million
Expenses: $1.2 million

Part A (16 marks)

Required

Identify the potential risks of material misstatement and explain why each is a
risk.
16 marks

Part B (4 marks)
A1 calculates overall materiality for profit-oriented entities as 10% of net profit before tax.
Performance materiality is generally calculated as 75% of overall materiality where there is
no history of identified misstatements. Where there is a history of identified misstatements,
performance materiality is generally 65% of overall materiality.

Required

Calculate overall and performance materiality levels for the twelve (12) months
ending 31 December 20X6 based on results to date.
4 marks

End of Question 1
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Audit & Assurance Chartered Accountants Program

Question 2 (20 marks)

Background
You have recently been promoted to senior auditor within the assurance department of your
firm A+ Accounting (A+). You have been assigned as the senior auditor on the upcoming audit
engagement of F1tFirst Ltd (F1tFirst) for the year ending 31 December 20X6. F1tFirst publishes
a magazine twice monthly. It is aimed at individuals and businesses in the fitness and health
market. With regular interviews from top athletes and cutting-edge fitness regimes, F1tFirst
is regarded as a leader in modern day fitness magazines and has remained profitable despite
recent economic downturns. F1tFirst is only available by subscription, not as an ‘off-the-shelf’
purchase.
Your audit manager, Mary, has requested that you develop and carry out appropriately tailored
audit procedures over the revenue cycle. The draft revenue amount as per the trial balance for
the year ending 31 December 20X6 is comprised as follows:

Advertising revenue 3,502,992

Subscription revenue  2,212,845

Total 5,715,837

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Question 2 (cont.)

Part A (9 marks)

Subscription revenue
In 20X6 the yearly subscription was competitively priced at $145.00 and the number of
subscriptions for the year was 15,200 according to management accounts. In relation to
subscription revenue, the team has not rebutted the assumed risk relating to fraud in
revenue recognition and has assessed the risk of material misstatement at the assertion level
as significant.
After performing a walkthrough of the subscription revenue process, the following process
notes were placed on file:

Process notes
Before the start of the financial year, the annual subscription fee is set by senior
management, tabled at their board meeting and minuted. Any ad hoc changes to this
fee must be approved by senior management and minuted in the board meeting of
the respective month of the change. The annual subscription fee in 20X5 was $140.00.
The number of subscriptions is monitored on a daily basis by one of the members
of the finance team, with the updated numbers communicated to management
each month in a report. The finance manager reviews the report before it is sent to
management. Subscribers pay the full annual fee, irrespective of when they take out
the subscription. No part payments are accepted nor refunds given for part-year
subscriptions.

Required

Design three (3) tests of controls for subscription revenue and identify the key
assertion each test addresses.
9 marks

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Audit & Assurance Chartered Accountants Program

Question 2 (cont.)

Part B (11 marks)

Advertising Revenue
Approximately 60% of F1tFirst’s revenue is derived from advertising revenue from gyms
and other businesses that choose to advertise their products and/or services in the magazine.
Individual advertisements in a single publication range from half page, full page and a double
page spread. The respective prices are detailed in the table below:

Ad formats Number of pages Number of adverts Price per advert

$

Double-page spreads 8 4 12,540

Full-page 10 10 6,810

Half-page 5 10 4,400

Each issue has 23 pages allocated for advertisements and generally all 23 pages are filled every
issue, with a waiting list of businesses wishing to advertise. Discounts of 20% are generally
offered on all double-page spread advertisements.
During one of your planning meetings, the team rebuts revenue recognition as a risk of material
misstatement due to fraud in respect of the advertising revenue stream. The team also finds
the assessed risk of material misstatement at the assertion level not significant for advertising
revenue, due to the lack of complexity.
After performing a walkthrough of the advertising revenue process, the following process notes
were placed on file:

Process notes
Before the start of the year, prices and discounts are set by senior management, tabled
at the board meeting and minuted. Any ad hoc changes to the price must be approved
by senior management and minuted in the board meeting minutes in the respective
month of the change.

The team has tested controls over advertising revenue price changes and the number of
advertising pages per publication and has not noted any exceptions. Based on their knowledge
of the company accumulated over a number of audits, A+ accepts the annual number of
publications provided by management. Performance materiality has been set at $165,000.

Required

Design and perform a substantive analytical procedure over the advertising

revenue, specifically:
(i) Identify the relevant financial and non-financial data items.
(ii) Evaluate the reliability of each data item.
(iii) Determine an acceptable variance and develop an expectation.
(iv) Calculate the variance (if any) and conclude.
11 marks

End of Question 2
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Chartered Accountants Program Audit & Assurance

Question 3 (20 marks)

Background
You are the audit senior working for ZUR, a large international audit firm. You have been assigned
to the 31 December 20X6 audit of consolidated financial statements of Tameli Metals Group
(Tameli). Tameli is a listed entity preparing general purpose financial statements. It specialises in
mining of iron ore, nickel and copper. It has a head office and mining operations in Australia and
wholly owned subsidiaries in Chile, Brazil, South Africa, Papua New Guinea (PNG) and Russia.
Tameli’s estimated profit before tax for the financial year 20X6 is $11.8 million. Materiality for
the audit of consolidated financial statements is 5% of profit before tax.

Part A (8 marks)
The Tameli group engagement partner, Michael Lee, has determined that components
contributing more than 20% of Tameli’s profits are individually financially significant.
All assurance work relating to the financial information of Tameli’s components are performed
by ZUR international affiliate firms. All components have a December year-end.
You have prepared a draft scoping memorandum for the Tameli group audit. This is presented
below:
Location Contribution Component Classification of Risk Type of work
to group’s materiality component
profits (%) ($)
Chile 29 590,000 Significant Low Audit
Brazil 23 300,000 Significant High Review
South Africa 5 50,000 Non-significant Low Audit of revenue and PPE
Russia 5 50,000 Non-significant Low Audit of revenue and PPE
PNG 3 30,000 Non-significant Low Analytical procedures at
a Group level

Based on your past experience working with the local Chilean component auditor, you know that
the audit team is highly competent. In addition, the audit team has already sent you a confirmation
stating that nothing in relation to its ability to perform the work, including independence
considerations, has changed from the previous year. Based on his discussions with Tameli’s
management in Chile and a teleconference held with the Chilean component auditor, Michael is
satisfied that there have not been any significant changes from the previous year. After reviewing
the Chilean component auditor’s planning memorandum, which included its risk assessment,
Michael confirms the assessment of risk to the group financial statements as low and instructs you
to send the Chilean component auditor the same audit instructions as were sent the previous year.

Required

(a) Outline two (2) reasons why the draft group scoping memorandum is not (4 marks)
compliant with the key requirements of the relevant Auditing Standard, and
recommend how to achieve compliance.
(b) Identify four (4) factors which indicate that the group audit has otherwise (4 marks)
been planned and scoped in accordance with the key requirements of the
relevant Auditing Standard.
8 marks

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Audit & Assurance Chartered Accountants Program

Question 3 (cont.)

Part B (12 marks)

It is now early February and you are helping to finalise the audit and draft the auditor’s report,
which is due to be signed on 15 February 20X7. Tameli’s profit before tax as per the trial balance
remains at $11.8 million.
You consider the following information:
1. An extract from Tameli’s draft statement of consolidated financial position as at
31 December 20X6 before any adjustments proposed by the audit team:

Trade payables 6,389,000

Other payables 4,353,000

Interest bearing loans 556,000

Employee benefits 172,000

Total current liabilities 11,470,000

Total liabilities 15,893,000

Misstatements identified during the audit work included the following:

•• Unrecorded liabilities testing of trade payables identified a misstatement of $678,000.
This was an unrecorded invoice payable to a shipping company for metals shipped from
Australia on 31 December.
•• Using sampling software, the team selected a sample of other payables for testing.
The value of the population tested was $2,176,500. Testing detected a misstatement of
$185,000.

ZUR’s audit methodology requires an assessment of uncorrected misstatements both

individually and in aggregate against overall materiality. Misstatements that comprise more
than 10% of the relevant financial statement line item are considered to be individually
material.
Michael discussed the misstatements with Tameli’s management. As a result, management
agreed to adjust the payable due to a shipping company. However, management was
sceptical of the statistical sampling method used by the audit team and did not make the
adjustment in relation to other payables.
2. Management’s assessment of the recoverable amounts of property, plant and equipment
(PPE) across the Tameli group incorporates significant judgement in respect of factors such
as future production levels and commodity prices, and assumptions such as discount rates,
inflation rates and foreign currency rates. In the audit, a considerable amount of the senior
audit manager’s time and the partner’s time was spent in testing management’s assessment
of recoverable amounts. The audit testing corroborated management’s position that these
assets were not impaired.

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Chartered Accountants Program Audit & Assurance

Question 3 (cont.)
3. The following is an extract from the notes to Tameli’s consolidated financial statements:

Note 31 Events after the reporting period

On 10 January 20X7, a severe storm caused significant structural damage to Tameli’s
copper mine in Tasmania. The mine has not been operational since and is expected
to remain closed for repairs until July 20X7. The group is in the process of estimating
the amount of the loss, following which it will file a claim for reimbursement with the
insurance company. The initial estimate of repair costs exceeds $2.5 million

The audit team obtained sufficient appropriate evidence to corroborate the disclosure in the
financial statements. The matter did not require significant auditor attention in the audit of
the current period financial statements.
4. The audit file includes a note detailing a discussion between the engagement partner
and Tameli’s CFO relating to materially inconsistent revenue figures between the CEO’s
commentary presented in the annual report and the financial statements. The revenue
figures in the financial statements were not misstated. Following the discussion with the
audit partner, Tameli’s management amended the CEO’s commentary and a copy of the
final annual report was placed on the audit file on 12 February 20X7.

Required

(a) In accordance with ZUR’s audit methodology, determine whether Tameli’s (4 marks)
financial statements are materially misstated. Justify your response and
show all workings.
(b) Determine and justify the appropriate auditor’s opinion and explain any (8 marks)
further implications on the auditor’s report.
12 marks

End of Question 3
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Audit & Assurance Chartered Accountants Program

Question 4 (20 marks)

Background
You are a newly qualified Chartered Accountant and an audit senior within your firm, Miles
& Miles Associates (Miles). In the past year, your firm successfully tendered to be the external
auditor of listed entity DTS Goods Limited (DTS), a manufacturer of children’s toys. DTS has a
financial year end of 30 June.
Miles has already concluded its first engagement of DTS: an audit of the financial statements
for the year ending 30 June 20X6 where an unmodified opinion was issued. It is now January
20X7 and Miles is about to undertake its first review engagement of DTS for the six months
ending 31 December 20X6. You are the audit senior on the review engagement but you had no
involvement with the previous year-end audit.
Connor Ross is the partner on the DTS engagement and has sent you the following email:

Hi. As we discussed, the team and I spent a considerable amount of

time with the client at year end as it was an initial engagement. This
had a detrimental impact on our engagement margins and also took up a
considerable amount of management’s and the finance team’s time with
meetings, detailed controls testing and substantive testing. I don’t
want this to be the case again and it doesn’t need to be for a review.
As the audit senior on the engagement, I therefore want you to take
responsibility for the following:
- 
Adopting the appropriate Standard for the engagement, and ensuring it
is applied in the planning process.
- Ensuring we are ‘reviewing’ and not ‘auditing’.
- Ensuring the appropriate type of report is issued.
Let me know how the team is tracking. It is an inexperienced team, so you
will need to keep on top of things. Thanks. CR

Part A (4 marks)

Required

(a) Explain why DTS is preparing financial statements for the period ending (2 marks)
31  December 20X6 and identify the relevant Standard applicable to the
engagement.
(b) Describe two (2) key differences between an audit and a review when (2 marks)
considering materiality.
4 marks

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Chartered Accountants Program Audit & Assurance

Question 4 (cont.)

Part B (13 marks)

Before commencing the fieldwork, Connor would like to check the procedures that the team
is going to follow for specific areas of the engagement. Before designing the procedures, you
obtained access to the 30 June 20X6 audit file and extracted the working papers for these specific
areas. An extract from the audit file is shown below:

Area Audit procedures (extract)

Planning – Read the minutes of the meetings of shareholders, those charged with governance and
other relevant committees

Inventory – Obtain the inventory list and determine if the total agrees with the balance in the trial
balance
– Obtain detailed listing of any consignment stock, select a sample of items and agree to
supporting documentation to ensure the items have been properly accounted for

Borrowings – Recalculate the annual interest expense on the loan balances

– Obtain a schedule of loans payable and determine whether the total agrees to trial balance

Litigation – Enquire with persons responsible for financial reporting and the in–house legal team
matters whether entity is subject to any pending or ongoing legal action
– Obtain detailed listing of all legal expenses incurred in the period and agree to supporting
documentation, understanding the nature of each expense

Going – Consider the adequacy of disclosure about going concern matters in the financial
concern statements
– Obtain the cash flow forecast and budget for 12 months from the date of the audit report,
critically assess the assumptions and inputs used, applying sensitivity analysis, and consider
the appropriateness of management’s use of the going concern basis of accounting

Required

With regard to the above extract from the audit file, determine the
appropriateness  of each audit procedure for the engagement. For each
procedure that is inappropriate, design a suitable procedure.
13 marks

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Question 4 (cont.)

Part C (3 marks)
The fieldwork has now been completed with no misstatements identified. However, due to
flood damage to key documents, the client has been unable to provide any records relating to
the material trade payables balance, preventing your review of the trade payables books and
records. All other review procedures were sufficiently carried out.

Required

Determine the most appropriate review report to issue, and explain your reasons.

3 marks

End of Question 4

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 Audit & Assurance (3) 2016

Main exam suggested

solutions

Copyright © Chartered Accountants Australia and New Zealand 2017. All rights reserved.
This publication is copyright. Apart from any use as permitted under the Copyright Act 1968 (Australia) and Copyright Act 1994 (New Zealand),
as applicable, it may not be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part,
in any form or by any means, without the prior written consent of Chartered Accountants Australia and New Zealand.
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Chartered Accountants Program Audit & Assurance

Question 1 (20 marks)

Part A (16 marks)

Any eight of the following risks were acceptable:

# Risk Explanation of risk

1 Behind budget and declining results This may provide management with incentive to perpetrate
fraud via manipulation of financial statements (e.g. overstated
revenue)

2 The assumptions in half-year discounted The risk of impairment is enhanced with aggressive
cash flow remain unchanged despite assumptions remaining unchanged since the 30 June half year
A1’s recommendations

3 The finance manager assumed payroll
responsibilities for almost six months of
the year
There is an opportunity for fraudulent payroll activity
undertaken by the finance manager, with a lack of segregation
of duties
or
Multiple roles may create risk of inaccuracies in financial
information with insufficient resources allocated to key areas

4 A new payroll manager has been There is a risk that year-end payroll accounts are misstated as
appointed three days before year end a new employee with no knowledge of the company will have
responsibility for the year-end reconciliations

5 There is a history of identified With a history of identified misstatements, this increases the
misstatements likelihood there could be misstatements in the current year
audit

6 Additional audit effort has historically
been required to address disclosure
issues
or
Listed entity disclosure and regulatory
requirements
With a history of financial statement disclosure issues, there
may again be inaccuracies and/or insufficient note disclosures
which may again require additional audit effort
or
Additional disclosures required in a listed set of financial
statements, meaning more exposure to error

7 Management has proposed audit
fieldwork to commence only four days
after year-end and to sign and release
the financial statements less than two
weeks later
So close to year end, the audit support (e.g. reconciliations) may
be incomplete or inaccurate, with year-end journals potentially
yet to be processed. This is a very tight deadline, which may also
increase pressure on auditors

8 A customer has gone into administration There may be a requirement to write off the balance as a bad
and, despite assurances, a material debt expense if recoverability of the balance is still deemed an
payment has not been received issue or if a sufficient provision has not been made. This could
result in overstated debtor balance

9 Results declining and potential loss of There is a potential going concern issue as a result of decreasing
major contract margins and potential loss of a material contract. Respective
going concern disclosures may also have to be considered

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Part B (4 marks)
Net profit before tax for the nine months ending 30 September: $700,000
Forecast profit extrapolated to 12 months (($700,000 ÷ 9) × 12): $933,333
Overall materiality per methodology 10% of net profit before tax: $93,333
Performance materiality of 65% (due to a history of misstatements): $60,667

Learning outcomes

Unit Learning outcome

4 1. Explain and apply the process of risk identification

3. Discuss and demonstrate the auditor’s responsibility to identify and assess the risks of
material misstatement in financial statements

7 1. Define materiality and explain factors that impact its determination

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Chartered Accountants Program Audit & Assurance

Question 2 (20 marks)

Part A (9 marks)
Any three of the following tests of controls are acceptable:

Control Procedures Key assertion

1. Annual price changes are Verify subscription price change approval by Accuracy
approved vouching to respective Board minutes

2. Ad hoc price changes are Obtain details of any ad hoc price changes made in Accuracy
approved the year and check this price change approval by
agreeing to respective Board minutes

3. Finance manager reviews Verify finance manager review of monthly Accuracy

monthly reports subscription numbers by checking his review of a
or
sample of monthly reports
Completeness

4. Daily subscription numbers
monitored
Observe finance team member performing daily Accuracy
review of subscription numbers
or
or
Completeness
Select a sample of days and check for evidence of
review being performed over subscription numbers

5. Part payments are not Trace a sample of subscriptions undertaken after Accuracy
allowed 1 January 20X6 to ensure no part payments
or
(i.e. full payment is implemented for subscriptions
undertaken mid-year) Completeness

6. Price changes applied to 20X6 Ensure updated price change has been Accuracy
appropriately applied to 20X6 financial year by
vouching a sample of sales invoices

Part B (11 marks)

Four steps of performing a SAP:
(i) Identify the relevant financial and non-financial data items
•• Total number of pages and total number of advertisements.
•• Price per advertisement, including any discounts.
•• Number of publications per year.

(ii) Reliability of each data item

•• Through controls testing, A1 has comfort over the total number of pages and
advertisements per publication.
•• Through controls testing, A1 has ensured the applicable prices per advertisement are
approved by senior management and applied accordingly.
•• A1 has cumulative audit knowledge of the number of publications made annually.

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(iii) Determine acceptable variance and develop an expectation:

Number Number of Price per Discount Net Total per

of pages advertisements advertisement price advertisement
$ $ $ $

Double-page 8 4 12,540 (2,508) 10,032 40,128

spread

Single-page spread 10 10 6,810 – 6,810 68,100

Half-page spread 5 10 4,400 – 4,400 44,000

Revenue per magazine 152,228

No. publications 24

Expected revenue 3,653,472

The acceptable variance is set at performance materiality of $165,000.

(iv) Calculate variance and conclude :
Actual revenue per trial balance $3,502,992
Expected revenue per SAP $3,653,472
Variance ($150,480)

The variance is below that of the pre-defined threshold of $165,000. A1 has sufficient,
appropriate audit evidence that the advertising revenue is free of material misstatement and
no further work has to be performed.

Learning outcomes

Unit Learning outcome

4 2. Discuss and demonstrate the auditor’s responsibility to gain a thorough understanding of

the entity and its environment

8 2. Explain how to develop an overall audit plan to ensure an effective and efficient audit
3. Assess how the nature, timing and extent of tests of controls and substantive procedures
are impacted by factors discovered in the audit planning process

9 1. Design, perform and evaluate the results of controls testing

10 2. Design, perform and evaluate the results of substantive testing

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Question 3 (20 marks)

Part A (8 marks)
(a)

Reason for non-compliance with ISA 600 Recommendation

Materiality level for the Chilean subsidiary is not Lower the component materiality below the level of
appropriate. Component materiality must be lower group materiality of $590.000
than group materiality

The Brazilian subsidiary is a significant component The subsidiary must be audited using component
due to its individual financial significance to the materiality
group. Review of the component is not appropriate

(b) Any four (4) of the following were acceptable:

•• Classification of components to ‘significant’ and ‘non-significant’ appears appropriate.
•• Materiality levels for all components (except for the Chilean subsidiary) appear
appropriate (lower than the group materiality).
•• Performing an audit on the Chilean component appears appropriate.
•• Performing an audit of revenue and PPE for South African and Russian subsidiaries
appears appropriate.
•• Performing analytical procedures at a group level appears appropriate for PNG.
•• The group auditor’s involvement in the risk assessment of the Chilean component
appears appropriate.
•• The group auditor has adequately communicated with the Chilean component auditor.
•• The Chilean component auditor appears to be competent and independent.
•• The audit documentation includes an analysis of components, indicating those that
are significant and the type of work performed on the financial information of the
components.

Part B (12 marks)

(a) To evaluate the impact of the misstatement in other payables, the misstatement must first be
projected to the population. This is calculated as follows:
Misstatements in the sample $185,000 × Population value $4,353,000 ÷ Sample value $2,176,500.
The projected misstatement is $370,000.
The impact of the projected misstatement of $370,000 is not individually material when
compared to the overall materiality of $590,000 or the other payables balance (8.5%).
As management corrected the individually material misstatement of $678,000 relating to the
payment to a shipping company, no material misstatement remains.
(b) The appropriate audit opinion is unmodified, because the auditor had obtained sufficient
appropriate audit evidence that the financial statements are free from material misstatement
Further implications on the auditor’s report:
•• Given the significance of the subsequent event, it is appropriate to include an EOM
paragraph. The EOM paragraph refers to the note in the financial statements and
highlights the event after the reporting period.
•• A section on key audit matters would be included. The key audit matters section would
explain why the matter related to PPE was a key audit matter and how the audit team
addressed it.

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Audit & Assurance Chartered Accountants Program

•• 'Other information' section must be included in the auditor’s report. This is because
Tameli is a listed entity (an FMC reporting entity considered to have a higher level of
public accountability in New Zealand) and the auditor received the annual report before
the date of the auditor’s report. As the material inconsistency between the financial
statements and the other information was corrected before the audit report was signed,
the section contains a statement that the auditor has nothing to report.

Learning outcomes

Unit Learning outcome

11 3. Evaluate the effect of identified misstatements on the audit, and of uncorrected

misstatements on the financial statements

12 3. Explain the special considerations that apply to group audits, in particular those that involve
component auditors

14 4. Explain the auditor’s responsibilities in relation to other information

15 1. Identify and explain the auditor’s responsibility to form an opinion and provide an auditor’s
report
2. Describe and explain the different types of auditor’s reports that an auditor may issue
3. Identify and justify the choice of the appropriate auditor’s report for an entity based on the
results of audit work conducted for that entity

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Chartered Accountants Program Audit & Assurance

Question 4 (20 marks)

Part A (4 marks)
(a) As DTS Goods Limited (DTS) is a listed entity (or an ‘issuer’ in New Zealand), it must
comply with the conditions of the listing rules, which include a requirement to prepare and
release half yearly financial statements.
As the independent auditor of DTS, Miles & Miles Associates must apply ISRE 2410 Review
of Interim Financial Information Performed by the Independent Auditor of the Entity (ISRE 2410)
or ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity
(Compiled) or NZ SRE 2410 Review of Financial Statements Performed by the Independent
Auditor of the Entity as the relevant standard for the review engagement.
(b) • Performance materiality is not required on a review engagement.
•• Overall materiality based on interim (six-month) data is generally less than materiality
for annual financial data.

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Audit & Assurance Chartered Accountants Program

Part B (13 marks)

Area Audit procedures (extract) (i) Appropriate? (ii) Alternative procedure

Planning •• Read the minutes of the Yes N/a

meetings of shareholders,
those charged with
governance and other
relevant committees

Inventory •• Obtain the inventory list and Yes N/a

determine if the total agrees
with the balance in the trial
balance
•• Obtain detailed listing of any
consignment stock, select a
sample of items and agree to
supporting documentation
to ensure they have been
properly accounted for
No Enquire with management
whether any inventory has
been consigned to or from
the entity and, if so, whether
adjustments have been made
to exclude or include from
inventory accordingly

Borrowings •• Recalculate the annual No Consider the reasonableness

interest expense on the loan of the interest expense in
balances relation to loan balances
•• Obtain a schedule of loans Yes N/a
payable and determine
whether the total agrees to
trial balance

Litigation matters •• Enquire from persons Yes N/a

responsible for financial
reporting and in-house
legal team if entity has been
subject to any pending or
ongoing legal action
•• Obtain detailed listing of No Review expense account
all legal expenses incurred for any material litigation
in the period and agree to related cost items and
supporting documentation, enquire as to their nature with
understanding the nature of management
each expense

Going concern •• Consider the adequacy Yes N/a

of disclosure about going
concern matters in the
financial statements
•• Obtain the cash flow forecast
and budget for 12 months
from the date of the audit
report. Critically assess the
assumptions and inputs
used, applying sensitivity
analysis, and consider
the appropriateness of
management’s use of the
going concern assumption
No Consider the going concern
assumption and review
management’s mitigating
factors if conditions which
cast significant doubt on
entity’s ability to continue
as a going concern come to
attention

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Chartered Accountants Program Audit & Assurance

Part C (3 marks)
The most appropriate report to issue contains a qualified conclusion. This is because there is a
limitation of scope not imposed by management. This is material but not pervasive.

Learning outcomes

Unit Learning outcome

16 1. Identify the key differences between an audit and a review engagement

2. Determine which Standards apply and the assurance practitioner’s responsibilities with
respect to various types of review engagements

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