ACCA AA Syllabus D. Audit Evidence - Bank & Cash - Past Papers ^{15 / 18}

Airsoft Co is a listed company which manufactures stationery products. The company’s profit before tax for the year ended 31 December 20X6 is $16·3m and total assets as at that date are $66·8m. You are an audit supervisor of Biathlon & Co and you are currently finalising the audit programmes for the year-end audit of your existing client Airsoft Co. You attended a meeting with your audit manager where the following matters were discussed:

Trade payables and accruals
Airsoft Co purchases its raw materials from a large number of suppliers. The company’s policy is to close the purchase ledger just after the year end and the financial controller is responsible for identifying goods which were received pre year-end but for which no invoice has yet been received. An accrual is calculated for goods received but not yet invoiced (GRNI) and is included within trade payables and accruals.

The audit strategy has identified a risk over the completeness of trade payables and accruals. The audit team will utilise computer assisted audit techniques (CAATs), in the form of audit software while auditing trade payables and accruals.

Bank overdraft and savings accounts
Airsoft Co’s draft financial statements include a bank overdraft of $2·6m, which relates to the company’s main current account. In addition Airsoft Co maintains a number of savings accounts. The savings account balances are classified as cash and cash equivalents and are included in current assets. All accounts have been reconciled at the year end.

Directors’ remuneration
Airsoft Co’s board is comprised of eight directors. Their overall remuneration consists of two elements: an annual salary, paid monthly; and a significant annual discretionary bonus, which is paid in a separate payment run on 20 December. All remuneration paid to directors is included within wages and salaries. Local legislation requires disclosure of the overall total of directors’ remuneration broken down by element and by director.

Required:
(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Airsoft Co’s year-end bank balances. (5 marks)

Elounda Co manufactures chemical compounds using a continuous production process. Its year end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the audit supervisor and the year-end audit is due to commence shortly. The following matters have been brought to your attention.

(iii) Bank loan
Elounda Co secured a bank loan of $2·6 million on 1 October 20X4. Repayments of $200,000 are due quarterly, with a lump sum of $800,000 due for repayment in January 20X7. The company met all loan payments in 20X5 on time, but was late in paying the April and July 20X6 repayments. (4 marks)

Required:
(a) Describe substantive procedures you should perform to obtain sufficient, appropriate audit evidence in relation to the above three matters.

Note: The mark allocation is shown against each of the three matters above.

(i) Describe FIVE types of procedures for obtaining audit evidence; and

(ii) For each type of procedure, describe an example relevant to the audit of BANK balances.

Note: The total marks will be split equally between each part. (10 marks)

(b) Hawthorn Enterprises Co (Hawthorn) manufactures and distributes fashion clothing to retail stores. Its year end was 31 March 2015. You are the audit manager and the year-end audit is due to commence shortly. The following three matters have been brought to your attention.

(ii) Bank reconciliation
During last year’s audit of Hawthorn’s bank and cash, significant cut off errors were discovered with a number of post year-end cheques being processed prior to the year end to reduce payables. The finance director has assured the audit engagement partner that this error has not occurred again this year and that the bank reconciliation has been carefully prepared. The audit engagement partner has asked that the bank reconciliation is comprehensively audited. (4 marks)

Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate audit evidence in relation to the above three matters.

Note: The mark allocation is shown against each of the three matters above.

Introduction

Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base spread across Europe. The company’s year end was 30 April 2013. Below is a description of the purchasing and payments system.

Purchasing system

Whenever production materials are required, the relevant department sends a requisition form to the ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see which can despatch the goods first.

This supplier is then chosen. The order clerk sends out the purchase order. This is not sequentially numbered and only orders above $5,000 require authorisation.

Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years and, as an experienced team member, he does not apply any application controls over the input process. Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is then posted manually to the general ledger by the purchase ledger clerk.

Payments system

Fox maintains a current account and a number of saving (deposit) accounts. The current account is reconciled weekly but the saving (deposit) accounts are only reconciled every two months. In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total amount of the payments list, which he authorises and then processes the bank payments.

Required:

Describe substantive procedures the auditor should perform to confirm the bank and cash balance of Fox Industries Co at the year end. (7 marks)

Shiny Happy Windows Co (SHW) is a window cleaning company. Customers’ windows are cleaned monthly, the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door.

SHW has a large number of receivable balances and these customers pay by cheque or cash, which is received in the stamped addressed envelopes in the post. The following procedures are applied to the cash received cycle:

1. A junior clerk from the accounts department opens the post and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies into the locked small cash box.

2. The contents of the cash box are counted each day and every few days these sums are banked by which ever member of the finance team is available.

3. The cashier records the details of the cash received log into the cash receipts day book and also updates the sales ledger.

4. Usually on a monthly basis the cashier performs a bank reconciliation, which he then fi les, if he misses a month then he catches this up in the following month’s reconciliation.

Required:

For the cash cycle of SHW:

(i) Identify and explain THREE deficiencies in the system; (3 marks)

(ii) Suggest controls to address each of these deficiencies; and (3 marks)

(iii) List tests of controls the auditor of SHW would perform to assess if the controls are operating  effectively. (3 marks)

Describe substantive procedures an auditor would perform in verifying a company’s bank balance. (7 marks)

You are the senior in charge of the audit of Brampton Co for the year ending 31 January 2010 and are currently planning the year-end audit. Brampton specialises in the production of high quality bread of various kinds.

During the interim audit you noted that, in the present economic down-turn, the company has suffered as its costs are increasing and its prices have been higher than its competitors because of lower production runs. One indicator of the problems facing the company is that it has consistently used a bank overdraft facility to finance its activities.

At the time of the interim audit you had discussed with company management what actions were being taken to improve the liquidity of the company and you were informed that the company plans to expand its facilities for producing white bread as this line had maintained its market share. The company has asked its bank for a loan to finance the expansion and also to maintain its working capital generally.

To support its request for a loan, the company has prepared a cash flow forecast for the two years from the end of the reporting period and the internal audit department has reported on the forecast to the board of directors.

However, the bank has said it would like a report from the external auditors to confirm the accuracy of the forecast. Following this request the company has asked you to examine the cash flow forecast and then to report to the bank.

Required:

(c) Describe THREE procedures you would adopt in your examination of the cash flow forecast. (6 marks)

Zak Co sells garden sheds and furniture from 15 retail outlets. Sales are made to individuals, with income being in the form of cash and debit cards.

All items purchased are delivered to the customer using Zak’s own delivery vans; most sheds are too big for individuals to transport in their own motor vehicles. The directors of Zak indicate that the company has had a difficult year, but are pleased to present some acceptable results to the members.

The income statements for the last two financial years are shown below:

Confirmation of the end of year bank balances is an important audit procedure.

Required:

Explain the procedures necessary to obtain a bank confirmation letter from Zak Co’s bank. (3 marks)