AC3093

Summer 2020 online assessment guidance

The assessment will be an open-book take-home online assessment within a 24-

The word limit for this assessment is 3,000 words (i.e. each answer should be
approximately 750 words). Anything beyond 3,000 words will not be read. Any
citations, references and direct quotations citations/references are included in the
word count. Any figures, graphs or tables are excluded from the word count.
You should complete this paper using word processing software (e.g. Microsoft Word).
This should be saved as a .doc or .docx file and then uploaded to the VLE as ONE
individual file including the coversheet. Each page should have your candidate
number in the header. Please do not write your name anywhere on any part of your
submission.
You may hand-write calculations, formulae, or diagrams, but these should be scanned
or copied and included as images in the Word document that you submit. Please ensure
that any images are inserted at the appropriate point of your document and correctly
aligned (i.e. markers will not need to rotate images to read them).
The paper will be available at 12:00 midday (BST) on Monday 13 July 2020.
You have until 12:00 midday (BST) on Tuesday 14 July 2020 to upload your file into
the VLE submission portal. However, you are advised not to leave your submission to the
last minute. We will deduct 5 marks if your submission is up to one hour late, 10 marks if
your submission is more than one hour late but less than two hours late (etc.).
If you think there is any information missing or any error in any question, then you should
indicate this but proceed to answer the question stating any assumptions you have made.
You may use any calculator for any appropriate calculations, but you may not use any
computer software to obtain solutions. Credit will only be given if all workings are shown.

The assessment has been designed with a duration of 24 hours to provide a more flexible
window in which to complete the assessment and to appropriately test the course learning
outcomes. As an open-book assessment, the expected amount of effort required to
complete all questions and upload your answers during this window is no more than 3
hours. Organise your time well and avoid working all night.

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You are assured that there will be no benefit in you going beyond the expected 3 hours
of effort. Your assessment has been carefully designed to help you show what you have
learned in the hours allocated.
This is an open book assessment and as such you may have access to additional
materials including but not limited to subject guides and any recommended reading. But
the work you submit is expected to be 100% your own. Therefore, unless instructed
otherwise, you must not collaborate or confer with anyone during the assessment. The
University of London will carry out checks to ensure the academic integrity of your work.
Many students that break the University of London’s assessment regulations did not
intend to cheat but did not properly understand the University of London’s regulations on
referencing and plagiarism. The University of London considers all forms of plagiarism,
whether deliberate or otherwise, a very serious matter and can apply severe penalties
that might impact on your award. The University of London 2019-20 Procedure for the
Consideration of Allegations of Assessment offences is available online at:
https://london.ac.uk/sites/default/files/governance/assessment-offence-procedure-year-
2019-2020.pdf
The University of London’s Rules for Taking Online Timed Assessments have been
included in an update to the University of London General Regulations and are available
at:
https://london.ac.uk/sites/default/files/regulations/progregs-general-2019-2020.pdf

© University of London 2020

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SECTION A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions from
this section.

1. Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range
of home equipment. Fiona Fielding, the daughter of the company’s founder, took
over responsibility for running the company in December 2018. She has little
management experience. Her main interest is in developing a new business line to
broaden the company’s activities. She has no interest in day-to-day internal control
activities preferring instead to adopt a more informal management style.
Fiona found a supplier of a new design of hot tub in Norway. She immediately
started to import these hot tubs financed by a substantial bank overdraft. The
company sells to retailers at £2,000 per unit representing a typical mark-up of 100%
on cost. At first sales averaged 50 units per month. Demand was so great that
Fiona was forced to engage a second supplier in Finland but at a purchase cost of
£1,500 per unit. That supplier required Fiona to sign a three-year contract
committing to purchase 400 units per annum.
In the last two months of the accounting period ended 31 December 2019, sales of
the hot tubs have fallen significantly and the selling price has had to be reduced by
30%. The hot tubs are sold with a three-year warranty. Some of the units bought
from Finland have developed faults which cannot be rectified on site. Customers
have insisted that the faulty units be replaced or a complete refund given. Fiona is
reluctant to tell the auditors exactly how many units have had to be replaced. At the
year-end, inventory consisted of 200 saunas. Fiona is adamant that these should
be valued at cost.
Payments due to the suppliers have been delayed because there have been
problems reconciling the invoices payable to suppliers with the deliveries received
from them. The supplier in Norway is threatening legal action to enforce payment
and the supplier in Finland is insisting on cash upfront before any more deliveries
are made.
REQUIRED:
1. Identify EIGHT specific factors that should concern the auditors and explain
why each factor is of concern?
(15 marks)

2. Outline FIVE substantive audit procedures that the auditors of TNH could
undertake and explain the purpose of each.
(10 marks)

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 2. Grove Clark is a ten-partner accountancy firm. It has been approached by five
potential audit clients and the partners are considering the independence and
ethical risks associated with taking on these audits.
Client A is a company in the financial services industry. Grove Clark have no
experience in this industry but they would like to build up some expertise in this
industry. The chief financial officer of Client A used to be a Grove Clark partner.
Client B has been recommended to Grove Clark by Client H. Clients B and H are
both in the manufacturing industry and have worked together on several large
contracts. If Grove Clark accept Client B, Company H expect a discount on its next
audit as commission for making the recommendation.
Client C is a new company with ambitious plans for growth and stock market listing.
Whilst Client C is currently exempt from statutory audit, the directors wish an audit
to be conducted to make it easier to negotiate lending arrangements with its bank.
A meeting with the bank has been scheduled for three months after the year-end
and the directors insist that the audited financial statements with an unmodified
report be available before the meeting.
Client D is a start-up company owned and managed by a couple of
scientist/inventors who have discovered a way of converting insects into food fit for
human consumption. They need to be associated with a reputable accounting firm
in order to approach large corporations for the finance needed to develop their
scheme and as a result they are happy to pay a higher fee.
Client E is a medium-sized I.T. company which has developed a new app for down-
loading music from the internet. The CFO resents having to pay an audit fee and
suggests instead that the audit fee could be taken either as new shares issued by
Client E or by the firm agreeing to accept 5% of the profits generated by the new
app.
Required:
a) For each potential client highlight any independence or ethics risks the
partners should consider and why. In addition, suggest safeguards that
could be considered to mitigate the relevant risks.
(15 marks)
b) Explain what is meant by ‘professional scepticism’ and how it is relevant to
the conduct of an audit of financial statements.
(10 marks)

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3. You are the partner in charge of audit quality in your firm. There are five audit
partners in the firm and you have reviewed the completed audit files of one client for
each audit partner. In each case, an unmodified audit opinion was issued. You have
found the following:
Client A: faced severe cashflow problems just before the end of the financial year but
the financial statements had been drawn up on the going concern basis. The
directors had been in negotiations with the bank to seek additional funding. The
negotiations were on-going at the time the financial statements were finalised. The
directors refused to disclose anything about the liquidity crisis in the notes to the
financial statements.
Client B: a computer hacker had accessed and corrupted the accounting data in the
accounts payable/suppliers’ ledger. There was no way of recovering the lost data.
The audit partner had been persuaded that given this year’s high profit figure, the
amount of possible misstatement of accounts payable would not be material.
Client C: was in need of capital investment and the major shareholders had agreed
in principle to inject new capital. The directors therefore produced the financial
statements on the going concern basis; they have made full disclosure in the notes
to the financial statements. The audit partner was satisfied that the additional
information was sufficient.
Client D: the audit team discovered a number of minor discrepancies that together
would suggest that reported income might be overstated by 0.01%.
Client E: your firm was appointed during the year following the sudden death of the
previous auditor, a sole practitioner. Although it had not been possible to find
evidence to support this year’s opening balances, the audit partner considered that
the previous auditor was highly professional and therefore last year’s figures could
be relied on.
Required:
a) For each client, indicate the extent to which you agree with the issuing of an
unmodified audit opinion and explain why. Where you disagree, explain your
reasoning and suggest a more appropriate form of audit opinion.
(15 marks)
b) In addition to the auditors’ opinion, what other messages would readers expect to
see in an audit report on a company’s financial statements?
(10 marks)

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4. You have recently been appointed the auditor of Freak Beans Ltd., which operates
a chain of health food shops in the south-west of England. Originally, the company
began 10 years ago with just one store catering to less conventional customers but
with increasing concern about consumers’ health and the sustainability of food
sources, the company attracted more mainstream customers. Demand in the last
five years has grown to the extent that the company has opened a new store every
year. Control is largely through the daily involvement of the owner, Mr. Semolina.
Each store has a manager hand-picked by Semolina himself. Each is paid a basic
salary with a generous profit-related bonus. Semolina believes this not only
incentivises the managers to work hard but also to be honest – if they skim from the
takings, their bonus will be reduced.
The accounting and control systems have remained much the same as when only
one store was operating. Semolina has noticed that one of his six stores routinely
reports modest sales figures but high net profits; it has high inventory levels but not
very much cash. Semolina is concerned but has been too busy to investigate fully.
Semolina recognises the need to formalise the financial control systems especially
as he is keen to continue to expand the business. However, he has no more of his
own money to invest and does not want to increase the company’s indebtedness to
the bank. One day, a friend of a friend introduced Semolina to a business contact,
an overseas investor, John Sago. Semolina instantly liked Sago who seemed very
knowledgeable about the health food industry and especially about the emerging
market for hemp-based food supplements. Sago explained that UK and European
regulations allowed the sale of certain hemp-based products. Sago went on to
explain that he believed he had discovered a loophole in the regulations which
allowed him legally to import and sell products that the regulators had yet to
approve. These products could produce very high profit margins while they
remained unregulated, but Sago warned that tighter regulations could be introduced
in two or three years. Sago said that he could sign contracts of supply that very day
and he urged Semolina to act fast.
As if to demonstrate his credentials, Sago showed Semolina a briefcase full of cash.
On the spot, Sago offered to invest £1million for a 10% stake in Freak Beans Ltd.
Sago said that his offer would stand until the end of the week; Semolina could either
take it or leave it.
Semolina comes to you, as the auditor, for advice.
Required:
a) From the above scenario, what are you principal concerns about your new
client and his request for advice?
(15 marks)
b) Set out what you understand to be the extent of auditors’ responsibilities
when faced with situations where clients either have committed acts or are
about to commit acts which auditors know or suspect may be in breach of
laws or regulations.
(10 marks)

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SECTION B

Answer ONE question and NO MORE THAN ONE further question from this section.
Each question is worth 25 marks.

5. Technology is playing an increasing role in audit work. Explain the benefits and
potential disadvantages of using technology.

6. Auditors are required to report on ‘a company’s ability to continue as a going concern’.

7. There has been much talk in the UK on the future of audit. How do you think the audit
profession and the audit process might develop over the next 10 years?

8. Examine the role of audit committees. Your answer should address, as a minimum, the
following questions:
What are audit committees?
What do they do?
What qualities are expected of audit committee members?
What are the benefits of having audit committees?

END OF PAPER

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