NBS-5021Y Copyright of the University of East Anglia Module Contact: Peter Russell, NBS UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series UG Examination 2019-20 Version 2 AUDITING AND ASSURANCE NBS-5021Y Time allowed: 3 Hours Answer FOUR questions: ALL questions from Section A, ONE question from Section B and ONE question from Section C. The maximum number of marks available for your answers in SECTION A is 60 marks The maximum number of marks available for your answers in SECTIONS B is 20 marks The maximum number of marks available for your answers in SECTIONS C is 20 marks Numbers in round brackets ( ) indicate the relevant mark applied to each part of the question. The TOTAL number of marks available for the paper is 100 Notes are not permitted in this examination. Do not turn over until you are told to do so by the invigilator. Page 2 NBS-5021Y Version 2 SECTION A Answer Section A in full 1. You are an audit partner in the accountancy firm Yorvic and are about to undertake the audit of Trendy plc for the year ending 30 June 2019. You have been the audit engagement partner of Trendy since it was founded five years ago. You are planning the current audit and have collected the following information. Background Trendy was established five years ago by a fashion designer who admits that she knows more about fashion than finance. Trendy specialises in supplying independent fashion outlets in university towns and cities. The main reason for Trendy's success is providing up-to-date fashions at reasonable prices for the student market. In five years Trendy's turnover rose from £100,000 to £5 million and operating profit from £10,000 to £500,000. This year turnover is budgeted to be £6 million and operating profit £600,000. Information related to the audit From 1 January 2019, Trendy added a second warehouse. However, it has been difficult to recruit experienced warehouse staff. The warehouse manager has therefore had to authorise all goods received into the new warehouse and all goods dispatched from the new warehouse. Trendy's success has depended on providing the right fashions at the right time. The recent weather however has been unfavourable and spring and early summer sales have been significantly down against budget and inventory at the warehouses has increased. As a result of the poor weather, sales at independent sales outlets are also down and a number of the outlets are finding it difficult to pay Trendy for the goods they have purchased. In order to strengthen Trendy's financial team a new chief accountant was employed and was promised a bonus of £30,000 if operating profit reached £600,000. She left Yorvic three years ago having qualified as an accountant but was not involved with the Trendy audit. Required a) Explain the elements of audit risk. (5 marks) b) Identify and explain five risk factors for the audit of Trendy. (10 marks) c) For each risk that you have identified discuss the appropriate audit response (procedures) that should be carried out and where appropriate identify internal controls you would advise Trendy to adopt, and how you would test those controls once implemented. (10 marks) d) Outline the auditor's responsibilities in connection with fraud. (5 marks) Total: 30 marks Page 3 NBS-5021Y Version 2 2. You are a newly promoted audit manager in the accountancy firm Norvic. You have been asked to undertake the audit of Builders Merchants plc (Builders) for the year end 31 March 2020. Although Builders has been audited by Norvic for a number of years, this is your first experience of working on the Builders audit. You have collected the following information to help you plan the audit. Builders opened its first branch in Norwich 20 years ago and has since established 25 branches in the East Anglia region. Each branch is linked to the Norwich head office by a computerised accounting system. The purchasing department is based in Norwich head office. Branch managers submit their requests for building supplies to the central purchasing department. These are collected together and purchase orders are issued to suppliers specifying the goods ordered and the branches to which they are to be delivered. The suppliers issue a confirmation setting out the prices, quantities and agreed discounts. The suppliers also provide a goods delivery note for the goods despatched to each branch. The branches send the delivery notes to the purchasing department to confirm the goods have been received, and also report any discrepancies between goods ordered and delivered. The suppliers submit invoices monthly to the purchasing department. The invoices are checked against the delivery notes to confirm the goods have been received, and the prices and discounts are checked. Any discrepancies are adjusted for by the purchasing department. Once the invoices are approved for payment they are passed to the accounting department for entering on the purchase ledger and for payment. The system has generally worked well and no problems were found at the interim audit. However, following a recent upgrade, the computer system has frequently crashed and communication between branches and head office have been severely disrupted for the three months leading up to the year end. To avoid disputes between Norvic and its suppliers, the finance director has authorised the processing and payment of suppliers invoices without checking against purchase order, goods delivered, pricing and discounts. The finance director has expressed confidence that this will not cause problems for the year end accounts and audit because of good, long standing relationships of trust between Norvic and its suppliers. TURN OVER Page 4 NBS-5021Y Version 2 Required a) Identify three sources of audit confidence. (6 marks) b) Discuss the audit work you would carry out to gain sufficient confidence that the purchases and trade payables figures are materially correct. (12 marks) c) Comment on the reliability of the sources of audit evidence you have used in seeking to assess whether the purchases and trade payables figures are materially correct. (6 marks) d) What options are available if you are unable to satisfy yourself that the amounts for purchases and trade payables are materially correct? (6 marks) Total: 30 marks Page 5 NBS-5021Y Version 2 SECTION B Answer ONE question from Section B 3. You have recently completed the audit of Diss plc and are in the process of finalising the audit opinion for the year ended 30 April 2019. The directors are satisfied that Diss will remain a going concern to 31 December 2019 without further financing but agree that after then further financing will be needed. They are confident of negotiating a satisfactory deal with their bankers by 31 December 2019 that will finance the business through to the end of 2020. You still have reservations as to whether Diss is a going concern. a) What are the responsibilities of directors and auditors in determining whether a company is a going concern? (8 marks) b) Diss has agreed to disclose the need for further financing after 31 December in their accounts. Outline the further audit work you would undertake to satisfy yourself as to whether Diss is a going concern. (12 marks) Total: 20 marks 4. Cars plc operates a chain of garages. Cars inventory consists of three main business elements: new cars second-hand cars car parts You are the auditor of Cars. You are satisfied that the inventory count is correct and you are now considering valuation of the inventory. Cars works to strict margins on each of the business elements. In order to simplify the valuation of the inventory the finance director proposes value inventory using the relevant margin for each business element. The finance director proposes that for new cars the valuation for the inventory should be 75% of the selling prices as listed on the forecourt, and the valuation for the inventory of second hand cars should be 10% of the selling price as listed on the forecourt. For car parts the finance director proposes valuing the inventory by taking the current manufacturers list prices, less a 5% discount which is the typical discount Cars is able to negotiate with its parts suppliers. a) What is the basic principle for determining the amounts at which inventory is stated in the balance sheet? (5 marks) b) How would you audit the value of inventory based on the proposals of the finance director? (10 marks) c) Discuss whether the method of inventory valuation proposed by the finance director of Cars is consistent with the basic principle of inventory valuation outlined in (a). (5 marks) Total: 20 marks TURN OVER Page 6 NBS-5021Y Version 2 SECTION C Answer ONE question from Section C 5. 'The audit expectations gap is a matter of considerable concern to all parties with an interest in the accountability process and in the credibility of the accountancy and auditing profession.' (Gray, Manson and Crawford, 2015, p. 754) What is the audit expectations gap and why is it a matter of considerable concern? (20 marks) 6. Discuss the advantages and disadvantages of the new 'extended' auditors report. (20 marks) END OF PAPER
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