Financial Statement Audit

AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Question

Your firm was recently appointed the statutory auditors of Foodys, a limited liability company in Nigeria, for the year ended December 31, 2015. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed as auditors.

The principal activities of the company are the distribution and retail of fine Spanish food products. All products are imported from suppliers based in Spain and delivered to Foodys’s central warehouse in the southwest of Nigeria. The company has its own retail outlets but also supplies national supermarket chains and small independent retailers in Nigeria. Sales through Foodys’s retail outlets are on a cash basis, and sales to supermarkets and independent retailers are on credit basis.

The company maintains computerised records for inventories held at the distribution centre and retail outlets. The inventory records are supported by continuous counting procedures, and as a result, the company does not undertake a physical count at the year end.

Foodys’s retail outlets are equipped with computerised tills. As each sale is recorded, the computer updates the quantity sold and the inventory balance. The manager at each outlet is responsible for banking the takings on a daily basis.

During the year, the company engaged consultants to design and implement the company’s new website with online ordering facilities. Under the terms of the contract, the website was scheduled to be operational by the end of September 2015 in order to take advantage of the high seasonal demand at this time of the year. Due to technical problems, the website was not launched until the end of November 2015. The consultants have been paid in full for their work. However, the company has commenced legal proceedings for breach of contract.

Despite failing to meet its sales targets in respect of online sales, the management accounts for the 11 months to November 30, 2015, indicate an increase in sales revenue of 12% compared with the same period in 2014. Inventory and receivables balances are significantly higher than the previous year as a result of the increased level of activity.

Management is planning to expand the retail activities of the business by opening additional retail outlets. It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the funding. The bankers require the audited financial statements before making a decision. Management is keen to have the funding in place to progress with the expansion and would like to have the audit completed by February 28, 2016.

Required:

(a) Identify the key business risks from the circumstances described above.
(b) List the factors which have led you to identify that risk.
(c) Outline the audit work you would perform to address the risk.

Answer

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Tags: Audit Work, Business Risks, Financial Statement Audit, Inventory, Legal Proceedings, Receivables
Level: Level 3

Topic: Risk Management in Audits

AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

Question

The audit of financial statements in Nigeria is not affected by ONE of the following:

A. Securities and Exchange Commission
B. Auditing Standards
C. Nigerian Accounting Standard Board
D. The Institute of Chartered Accountants of Nigeria
E. Auditing Exposure Drafts

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Oversight, Auditing Standards, Financial Statement Audit, Nigerian Regulations
Level: Level 3

Topic: Regulatory Framework and Professional Standards
Series: NOV 2011

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

Question

The audit plan and scope was presented to the Audit Committee of Deinde Limited for the year ended December 31, 2020. The external auditors of the company stated:

“We would estimate materiality using profit before tax for the full year. We would estimate our preliminary materiality based on expected results for the full year. We will perform a materiality re-assessment at year-end to confirm adequacy or otherwise of our preliminary materiality. We will report to the Audit Committee on all unadjusted misstatements greater than our established threshold unless they are qualitatively immaterial.”

Your uncle, who is a member of the Audit Committee, discussed this matter with you and requested that you explain the issue further.

Required:

a. Explain the concepts of materiality and performance materiality in an audit of financial statements.

(3 Marks)

b. Explain the benchmark for determining materiality. (5 Marks)

c. Discuss the factors that may affect the identification of an appropriate benchmark. (7 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Benchmarks, Financial Statement Audit, ISA Standards, Materiality, Performance Materiality, Risk Factors
Level: Level 3

Topic: Risk Management in Audits
Series: NOV 2022

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

Question

You are the Principal Partner in charge of a four-partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of Poles Apart Limited for the year ended 31 December 2013.

Poles Apart Limited was established two years ago and provides mobile phone service for individuals and businesses. The system established by the company comprises:

Small portable mobile phones, which allow subscribers to contact or be contacted by any other telephone.
The mobile phones can be used within the range of a local relay station that receives and sends calls to the mobile phone.
The local relay stations are linked to a central computer that connects the calls to other users, often through a computer telephone network.
Currently, the local relay stations cover one large city with a population of about 1,000,000. In the next year, the system will expand to all cities in Nigeria with populations over 250,000. By 2017, it will cover all motorways and cities with populations over 100,000, which will involve substantial capital expenditure and require additional borrowings.
The cost of the relay stations and central computer is capitalized and amortized over six years.
The mobile phones are manufactured by other companies and sold through retailers. Poles Apart Limited pays ₦2,000 to the retailer for each phone sold, which is capitalized and amortized over four years.
Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Charges for calls from other operators are also calculated by the company’s main computer.
All shares are owned by three wealthy individuals who serve as non-executive directors. They receive a fixed allowance and do not plan further investment in the company.
Establishing the network of relay stations and subscribers will result in losses for at least three years, with current borrowings at about 20% of shareholders’ funds. It is expected that the company will be highly geared by 2016.
As the company will not be immediately profitable, executive directors receive a basic salary and a bonus based on the number of subscribers.
The owners plan to float the company on the local Stock Exchange in 2016. The flotation will involve issuing new shares to the public and the three non-executive directors selling some of their shares.
Poles Apart Limited has several large competitors, each with comprehensive coverage of over 90% of the population.

Required:

a. Consider the risks associated with the audit of Poles Apart Limited. (12 Marks)

b. Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit engagement. This should include considering whether your firm has the technical and logistical ability to carry out the audit. (12 Marks)

c. Advise on whether you should accept or decline the audit assignment, giving your principal reasons for coming to this decision. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Risk, Client Acceptance, Ethical Issues, Financial Statement Audit, Going Concern, Independence
Level: Level 2

Topic: Risk Assessment and Internal Control

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

Question

Your audit firm has been the statutory auditors for Apenkwa Co. Ltd. for the last three years. The company prepares its financial statements to December 31 each year. Due to the size of the company, it has been the practice of the client to prepare interim financial information to June 30 every year. At the request of the client, you have been reviewing the interim financial information each year it is prepared.

Required:

Compare and contrast the audit of completed financial statements and the review of interim financial statements. (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance Level, Audit Procedures, Financial Statement Audit, Interim Financial Statement Review
Level: Level 3

Topic: Audit-related services, Practice management
Series: MAY 2017

AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Question

Required:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Work, Business Risks, Financial Statement Audit, Inventory, Legal Proceedings, Receivables
Level: Level 3

Topic: Risk Management in Audits

AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

Question

The audit of financial statements in Nigeria is not affected by ONE of the following:

A. Securities and Exchange Commission
B. Auditing Standards
C. Nigerian Accounting Standard Board
D. The Institute of Chartered Accountants of Nigeria
E. Auditing Exposure Drafts

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Oversight, Auditing Standards, Financial Statement Audit, Nigerian Regulations
Level: Level 3

Topic: Regulatory Framework and Professional Standards
Series: NOV 2011

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

Question

The audit plan and scope was presented to the Audit Committee of Deinde Limited for the year ended December 31, 2020. The external auditors of the company stated:

“We would estimate materiality using profit before tax for the full year. We would estimate our preliminary materiality based on expected results for the full year. We will perform a materiality re-assessment at year-end to confirm adequacy or otherwise of our preliminary materiality. We will report to the Audit Committee on all unadjusted misstatements greater than our established threshold unless they are qualitatively immaterial.”

Your uncle, who is a member of the Audit Committee, discussed this matter with you and requested that you explain the issue further.

Required:

a. Explain the concepts of materiality and performance materiality in an audit of financial statements.

(3 Marks)

b. Explain the benchmark for determining materiality. (5 Marks)

c. Discuss the factors that may affect the identification of an appropriate benchmark. (7 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Benchmarks, Financial Statement Audit, ISA Standards, Materiality, Performance Materiality, Risk Factors
Level: Level 3

Topic: Risk Management in Audits
Series: NOV 2022

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

Question

You are the Principal Partner in charge of a four-partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of Poles Apart Limited for the year ended 31 December 2013.

Poles Apart Limited was established two years ago and provides mobile phone service for individuals and businesses. The system established by the company comprises:

Small portable mobile phones, which allow subscribers to contact or be contacted by any other telephone.
The mobile phones can be used within the range of a local relay station that receives and sends calls to the mobile phone.
The local relay stations are linked to a central computer that connects the calls to other users, often through a computer telephone network.
Currently, the local relay stations cover one large city with a population of about 1,000,000. In the next year, the system will expand to all cities in Nigeria with populations over 250,000. By 2017, it will cover all motorways and cities with populations over 100,000, which will involve substantial capital expenditure and require additional borrowings.
The cost of the relay stations and central computer is capitalized and amortized over six years.
The mobile phones are manufactured by other companies and sold through retailers. Poles Apart Limited pays ₦2,000 to the retailer for each phone sold, which is capitalized and amortized over four years.
Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Charges for calls from other operators are also calculated by the company’s main computer.
All shares are owned by three wealthy individuals who serve as non-executive directors. They receive a fixed allowance and do not plan further investment in the company.
Establishing the network of relay stations and subscribers will result in losses for at least three years, with current borrowings at about 20% of shareholders’ funds. It is expected that the company will be highly geared by 2016.
As the company will not be immediately profitable, executive directors receive a basic salary and a bonus based on the number of subscribers.
The owners plan to float the company on the local Stock Exchange in 2016. The flotation will involve issuing new shares to the public and the three non-executive directors selling some of their shares.
Poles Apart Limited has several large competitors, each with comprehensive coverage of over 90% of the population.

Required:

a. Consider the risks associated with the audit of Poles Apart Limited. (12 Marks)

c. Advise on whether you should accept or decline the audit assignment, giving your principal reasons for coming to this decision. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Risk, Client Acceptance, Ethical Issues, Financial Statement Audit, Going Concern, Independence
Level: Level 2

Topic: Risk Assessment and Internal Control

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

Question

Required:

Compare and contrast the audit of completed financial statements and the review of interim financial statements. (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Assurance Level, Audit Procedures, Financial Statement Audit, Interim Financial Statement Review
Level: Level 3

Topic: Audit-related services, Practice management
Series: MAY 2017

Question Tag: Financial Statement Audit

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AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Required:

AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Required:

AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

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Question Tag: Financial Statement Audit

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AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Required:

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AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

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AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

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AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

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AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

You're reporting an error for "AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management"

AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Required:

You're reporting an error for "AAA – May 2016 – L3 – Q1 – Risk Management in Audits"

AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards

Identifies an entity not affecting the audit of financial statements in Nigeria.

You're reporting an error for "AAA – Nov 2011 – L3 – SA – Q9 – Regulatory Framework and Professional Standards"

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

You're reporting an error for "AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits"

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

You're reporting an error for "AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control"

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

You're reporting an error for "AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management"

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