ACCA Fundamentals Level Paper F8 Audit and Assurance Mock Examination
Question Paper Time allowed Reading and Planning Writing 15 minutes 3 hours
ALL FIVE questions are compulsory and MUST be attempted During reading and planning time only the question paper may be annotated
Instructions: Please attempt this paper under examination conditions
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS Source: BPP Learning Media
Paper F8 Mock Exam Questions Page 1 of 7
Question 1 All-Eco Co
All-Eco Co is an internet retailer selling a wide variety of ecologically friendly goods. Inventories are housed in a large warehouse from which orders are dispatched direct to customers. There are approximately 50,000 lines of inventory. The quantity held in inventory for any one line depends largely on its nature. Clothes tend to have smaller quantities than household goods, which turnover faster and are kept in larger quantities. The company has computerised inventory records. The system records inventory levels, costs, sales price, and movement history. It can identify the supplier of each item of inventory and when it was purchased. The system integrates with the order system to the extent that customers can see the level of inventory available when their order is placed. The company operates a perpetual inventory system. All inventory items are counted at least once every six months, with inventory counts taking place once a month. After each count, differences (which usually relate to damaged goods) are validated and authorised by a member of staff not usually connected with inventory and then amended on the system. All-Eco Co has experienced rising prices of goods during the year. Required: (a) Explain the advantages to All-Eco Co of using a perpetual inventory system. (4 marks) (b) List the audit procedures you should perform to confirm the completeness and existence of inventories in the financial statements at All-Eco Co. For each procedure, explain the purpose of that procedure. (12 marks) (c) List the substantive procedures you should perform to confirm the valuation of inventories in the financial statements at All-Eco Co. For each procedure, explain the purpose of that procedure. (6 marks) (d) Discuss the extent to which Computer Assisted Audit Techniques (CAATs) might be used in your audit of inventories at All-Eco Co. (8 marks) (Total: 30 marks)
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Question 2
(a)
Briefly explain the reasons for auditors documenting their work. (3 marks)
(b) SSA 530 Audit sampling and other means of testing states that in determining the sample size, the auditor should consider whether sampling risk is reduced to an acceptably low level. Required: List six factors that influence sample sizes for tests of details. (3 marks)
(c) Auditors report on whether financial statements contain material misstatements. Required: Define materiality and explain its impact on an audit. (4 marks) (Total: 10 marks)
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Question 3
Frank Shipley has been approached to accept a position as a non-executive director of Powerbolt Co, a listed company with operations in diverse business sectors, trading internationally. He has previously held senior positions in the public sector and is seeking out information about various aspects of his potential new role. Knowing that you work for an audit firm with many large companies as clients, he has asked you for an update on corporate governance regulation, particularly those aspects that relate to audit.
Required: You have been asked to prepare a memo which provides key information on the principles of good corporate governance. You should address the following in your memo: (a) The role and responsibilities of: (i) (ii) the internal audit function, and the external auditor
(10 marks)
(b) The role and responsibilities of the audit committee. (10 marks)
(Total = 20 marks)
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Question 4
You are the senior in charge of the audit of Sparks Co, a distributor of electrical components. A member of the audit team has undertaken a review of the accounting and control systems and has identified and confirmed the following significant points of weakness: (1) Purchases Purchase ledger clerks amend the payables master file with details of new suppliers on oral authority of the financial controller. No printout of amendments is obtained. (2) Sales Credit limit parameters within the sales order processing software are unrealistically low, resulting in a high volume of items being rejected as exceptions. (3) Cash at bank The monthly bank reconciliations prepared by the assistant accountant are not reviewed. (4) Contingency planning There is no formal disaster recovery plan.
Required: (a) Set out, in a manner suitable for inclusion in a report to management, the possible consequences of the above weaknesses and the recommendations to remedy the weaknesses. Your recommendations should clearly describe how the control procedures should operate. (12 marks) Note: You are not required to repeat the weaknesses in your answer. (b) Explain how a report on these matters written by internal audit would differ from the external auditors' report to management. (8 marks)
(Total = 20 marks)
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Question 5
Creation Co is a listed construction company with an annual revenue of $350 million and its draft income statement shows an operating profit for the year ended 31 December 20X8 of $40 million. This is the first audit by the audit firm. Enquiry of the previous auditor revealed no reasons for concern. On completing audit work at the company's premises, the audit senior drafts a memo, extracts from which are reproduced below. (a) Inventory valuation Inventories include $7 million, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country's Highways Agency, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review and, on being offered a special purchase of this material, Creation speculated on a favourable outcome of this review and purchased the material. In February 20X9, shortly before the financial statements were approved by the directors, the Highways Agency reported that it would not, currently, accept the use of this material. If used on nonHighways Agency contracts the material's net realisable value would not exceed $2 million. The finance director maintains that the issue of the Highways Agency report was a non-adjusting post balance sheet event. The write down of the inventory should, therefore, be reflected in the next period's financial statements. (6 marks) (b) Depreciation In 20X4 the company purchased two computer controlled earth movers at a cost of $2,500,000 each and a further two at the same price in 20X5. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 20X8, the company has decided that improvements in technology made it worthwhile scrapping their first two computer controlled earth movers and replacing them with the latest model at a cost of $4,000,000 each. The company's chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He argues that continued improvements in technology cannot be foreseen and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence. (7 marks) (c) Contingent liability The company is being sued for $50 million by the Highways Agency for defective work on a recently completed road. The company maintains that it met the Highways Agency's specification and it is the Agency's engineers who are at fault in drawing up the specification. Creation maintains that it has no case to answer, that the possibility of loss is remote and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company's road building techniques are under investigation by the Highways Agency. If the company were to lose the case its future going concern would be threatened. (7 marks)
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Required: Explain the effect of each matter (i) on the financial statements; and (ii) if the company were to refuse to amend the financial statements, on the auditor's report. Your answer should consider materiality where appropriate.
(Total = 20 marks)
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