f8 JUNE 2009 ANSwer

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  Answers FOR FREE ACCA RESOURCES VISIThttp://acuteacca.tkSEND YOUR REQUESTS ATemail@acuteacca.tkPAST PAPERS ARE UNDER COPYRIGHT©.FOR FREE ACCA RESOURCES VISIThttp://acuteacca.tkSEND YOUR REQUESTS ATemail@acuteacca.tkPAST PAPERS ARE UNDER COPYRIGHT©.  Fundamentals Level – Skills Module, Paper F8 (INT)Audit and Assurance (International) June 2009 Answers1(a) Audit strategy document (b)(i) Risk affecting completeness –The computer system does not record sales accurately and/or information is lost or transferred incorrectly from theticket office computer to the accounts department computer.–Cash sales are not recorded in the cash book; cash is stolen by the accounts clerks.–Tickets are issued but no payment is received – that is the sale is not recorded.–Cash is removed by the ticket office personnel, by the security guards or by the account clerks.–The account clerks miscount the amount of cash received from a ticket office. (ii) Use of tests of controls and substantive proceduresTests of controls Tests of control are designed to ensure that documented controls are operating effectively. If controls over thecompleteness of income were expected to operate correctly, then the auditor would test those controls.In B-Star, while controls could be in operation, e.g. the account clerks agreeing physical cash to computer summaries,there is no indication that the control is documented; that is the computer summary is not signed to show thecomparison has taken place. The auditor could use the test of inquiry – asking the clerks whether the control has beenused, and observation – actually watching the clerks carry out the controls. As noted above though, lack of documentation of the control does mean relying on tests of control for the assertion completeness of income has limitedvalue. Substantive procedures Substantive procedures include analytical procedures and other procedures.Analytical procedures include the analysis of significant ratios and trends and subsequent investigation of any trends orrelationships that appear to be abnormal. These procedures can be used effectively in B-Star as an approximation of income that can be obtained from sources other than the cash receipt records.Other procedures, or tests of detail, are normally used to verify statement of financial position assertions and includeobtaining audit evidence relevant to specific assertions. However, they could be used in B-Star to trace individualtransactions through the sales/cash systems to ensure all ticket sales have been recorded (completeness assertion). Theuse of other procedures will be time consuming. (c)(i) Substantive analytical procedures –completeness of income for one day –Obtain proof in total. Tickets sold times price should equal day’s income.–Compare daily sales to budgeted daily sales (for example weekends and bank holidays would expect more income).–Compare sales with previous days and account for changes such as variations for weather. 9 Section of documentPurposeExample from B-Star Understanding the entity’s environmentProvides details of the industry area thatthe company is in along with specificinformation about the activities andstrategies of the individual client.Size of the theme park sector andexpected growth over the next few years.Understand the accounting and internalcontrol systemsDetails of accounting policies of theclient and previous assessments of internal control systems indicating theexpected extent of reliance on thosesystems.Accounting policy for sales – sales arestated net of sales taxes.Reliance on control systems in B-Starmay be limited due to lack of documentation of controls.Risk and materialityThe assessment of risk for the client andrisk of fraud and error and theidentification of significant audit areas.The materiality level for audit planningpurposes.Materiality for sales to be 5% of turnover.B-Star receives cash sales – audit workrequired to determine the completenessof sales.Consequent nature, timing and extent of audit proceduresDetails of the focus on audit work onspecific areas. Detail on the extent of useof audit software and possible relianceon internal audit.Audit software could be used to provideanalytical procedures on the sales of B-Star.Co-ordination, supervision and review of audit workDetails the extent of involvement of experts, client locations and staffingrequirements for the audit.B-Star has only one location – audit staff will be required to work there for Xweeks.  –Compare sales to souvenirs sales (more people in park means more souvenir sales).–Compare ticket offices day-by-day and staff rotation to see if sales lower some day/some staff (attempt to identifyfraud also).–Compare the expected sales from ticket numbers to the total sales amount from cash and credit sales for each ticketoffice. (ii) Substantive analytical procedures –completeness of income for the year –Obtain the sales income from the previous year. Multiply this by 115% to provide a rough estimate of the incomefor this year.–Obtain information on the number of days with rain during the last year. Where this is more or less than 30, adjustthe income estimate by 1/730 down for each day of rain above 30 or 1/730 up for each day of rain less than 30.(Note: B-Star only attracts 50% of the normal number of customers on a rainy day; hence one day of rain decreasestotal customers by 1/730 in the year.)–Compare actual income to budgeted income for the year. Ask the directors to explain any significant deviations.–Obtain industry information on the popularity of theme parks, and change in customer numbers. Compare thesetrends to the results obtained by B-Star. Where B-Star performed significantly better or worse than average, obtainexplanations from the directors. (d) Audit of year end credit card receivable –Agree the balances on each credit card company’s ledger account to the list of receivables.–Cast the list of receivables and agree the total to the total on the receivables ledger control account.–For the last day of the financial year and the first day of the new financial year, agree total sales income from ticket officerecords to the cash book and receivables ledger ensuring they are recorded in the correct period.For a sample of material balances and a random sample of immaterial items,–Obtain direct confirmation from the credit card company of the amount due to B-Star using a receivables confirmationletter.–Where direct confirmation is not possible, obtain evidence of cash receipt after the end of the financial year. Agree theamount on the bank statements post year end of B-Star to the amount due in the receivables ledger (less anycommission due).–Review after date sales day book for debit notes indicating that sales may have been overstated in the prior year.–Obtain the financial statements of B-Star and ensure that the receivables amount is disclosed as a current asset net of commission due to the credit card companies. 2 (a) Sampling methods Methods of sampling in accordance with ISA 530  Audit Sampling and Other Means of Testing : Random selection. Ensures each item in a population has an equal chance of selection, for example by using random numbertables. Systematic selection. In which a number of sampling units in the population is divided by the sample size to give a samplinginterval. Haphazard selection. The auditor selects the sample without following a structured technique –the auditor would avoid anyconscious bias or predictability. Sequence or block. Involves selecting a block(s) of continguous items from within a population. Tutorial note: Other methods of sampling are as follows: Monetary Unit Sampling . This selection method ensures that each individual $1 in the population has an equal chance of being selected.  Judgemental sampling . Selecting items based on the skill and judgement of the auditor. (b) Assertions – classes of transactionsOccurrence. The transactions and events that have been recorded have actually occurred and pertain to the entity. Completeness. All transactions and events that should have been recorded have been recorded. Accuracy. The amounts and other data relating to recorded transactions and events have been recorded appropriately. Cut-off. Transactions and events have been recorded in the correct accounting period. Classification. Transactions and events have been recorded in the proper accounts. (c) Audit report termModified. An auditor modifies an audit report in any situation where it is inappropriate to provide an unmodified report. Forexample, the auditor may provide additional information in an emphasis of matter (which does not affect the auditor’s opinion)or qualify the audit report for limitation of scope or disagreement. 10  3 (a) (i) Benefits of using audit softwareStandard systems at client The same computerised systems and programs as used in all 25 branches of Tirrol Co. This means that the same auditsoftware can be used in each location providing significant time savings compared to the situation where client systemsare different in each location. Use actual computer files not copies or printouts Use of audit software means that the Tirrol Co’s actual inventory files can be tested rather than having to rely on printoutsor screen images. The latter could be incorrect, by accident or by deliberate mistake. The audit firm will have moreconfidence that the ‘real’ files have been tested. Test more items Use of software will mean that more inventory records can be tested – it is possible that all product lines could be testedfor obsolescence rather than a sample using manual techniques. The auditor will therefore gain more evidence and havegreater confidence that inventory is valued correctly. Cost The relative cost of using audit software decreases the more years that software is used. Any cost overruns this yearcould be offset against the audit fees in future years when the actual expense will be less. (ii) Problems on the audit of TirrolTimescale –six week reporting deadline –audit planning The audit report is due to be signed six weeks after the year end. This means that there will be considerable pressureon the auditor to complete audit work without compromising standards by rushing procedures.This problem can be overcome by careful planning of the audit, use of experienced staff and ensuring other staff suchas second partner reviews are booked well in advance. Timescale – six week reporting deadline –software issues The audit report is due to be signed about six weeks after the year end. This means that there is little time to write andtest audit software, let alone use the software and evaluate the results of testing.This problem can be alleviated by careful planning. Access to Tirrol Co’s software and data files must be obtained assoon as possible and work commenced on tailoring Cal & Co’s software following this. Specialist computer audit staff should be booked as soon as possible to perform this work. First year audit costs The relative costs of an audit in the first year at a client tend to be greater due to the additional work of ascertainingclient systems. This means that Cal & Co may have a limited budget to document systems including computer systems.This problem can be alleviated to some extent again by good audit planning. The manager must also monitor the auditprocess carefully, ensuring that any additional work caused by the client not providing access to systems informationincluding computer systems is identified and added to the total billing cost of the audit. Staff holidays Most of the audit work will be carried out in July, which is also the month when many of Cal & Co staff take their annualholiday. This means that there will be a shortage of audit staff, particularly as audit work for Tirrol Co is being bookedwith little notice.The problem can be alleviated by booking staff as soon as possible and then identifying any shortages. Where necessary,staff may be borrowed from other offices or even different countries on a secondment basis where shortages are acute. Non-standard systems Tirrol Co’s computer software is non-standard, having been written specifically for the organisation. This means thatmore time will be necessary to understand the system than if standard systems were used.This problem can be alleviated either by obtaining documentation from the client or by approaching the software house(with Tirrol Co’s permission) to see if they can assist with provision of information on data structures for the inventorysystems. Provision of this information will decrease the time taken to tailor audit software for use in Tirrol Co. Issues of live testing Cal & Co has been informed that inventory systems must be tested on a live basis. This increases the risk of accidentalamendment or deletion of client data systems compared to testing copy files.To limit the possibility of damage to client systems, Cal & Co can consider performing inventory testing on days whenTirrol Co is not operating e.g. weekends. At the worst, backups of data files taken from the previous day can bere-installed when Cal & Co’s testing is complete. 11   FOR FREE ACCA RESOURCES VISIThttp://acuteacca.tkSEND YOUR REQUESTS ATemail@acuteacca.tkPAST PAPERS ARE UNDER COPYRIGHT©.
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