[CorneliaLu]

bt27 wrote:I had:
Q1: matters relating to planning audit (6m), audit risk planning (24m) procedures re investment property (8m) ethical issue (both companies audited by same firm but one buying another and wants firm to produce DD) (8m)

Hi,
I posted the questions as above.

[CorneliaLu]

Hi,
I also took AAA UK version today. Here are the questions and my answers. Which audit risks have you picked?

Q1:Gruber Ltd
(a) Identify and evaluate the matters to be considered in respect of the initial audit engagement of Gruber Ltd
New client – lack in knowledge of business, internal control – > increase detection risk
By thorough audit planning, mitigate the detection risk.
Opening balances may be misstated. Need to do more work.
Comparative figures may be misstated. need to do more work.

(b) Evaluate significant audit risks for audit planning
1. Management override – family business, senior management are members of the board.
2. Revenue recognition of contracts with customers
3 year support service is a separate performance obligation, to be recognised throughout 3 years
3. Aryele Ltd- Contract assets – overstatement of contract assets and accrued profit from the contract
4. Johnson contract – contract liabilities and loss from the contract – misstated
5. The production facility on lease – right-of-use asset
6. Valuation of investment property – Natakomi Building in Edinburgh
7. The disclosure of the planned acquisition
8. The Disclosure of Related Party (Martin Gruber) and transactions (the intangible asset – Martin’s design)

(c ) design principal audit procedures for the audit of valuation of investment property
Legal documentation
Bank statement
Board minutes
Expert valuation report
Discuss with management about their assumptions
Obtain written representation

(d) Ethical issues raised and actions to be taken about the due diligence service for the potential buyer Willis Ltd
Gruber Ltd’s 60% shares is the target.
1. Conflict of interest and confidentiality
2. Self-interest and self-review threat

Q2:
(a) Arjan Ltd – final review and subsequent events
(i) Comment on the inconsistency between management’s response and the audit evidences.
1. Understatement of inventory
2. Overstatement of receivables

(ii) further actions including further substantive procedures
1. Inventory
(1) A copy of Inventory count register/report
(2) A copy of sample count working papers
(3) Meeting minutes between auditor assistant and management …
(4) (cannot remember)

2. Receivables
(1) A copy of breakdown of outstanding invoices
(2) A copy of receivables confirmation.
(3) Meeting minutes with the financial controller
(4) (cannot remember)

(b) Evaluate the uncorrected misstatements and comment on their individual impact on the audit opinion
(i) grant
Materiality: £5mil overstatement of grant income is material to total profit before tax.
Accounting issue:
Risk:
Material but not pervasive
Qualified opinion with an ‘except for…’ wording

(ii) sale of machinery
Materiality: £1mil overstatement is material to total profit before tax.
Accounting issue:
Risk:
Material but not pervasive
Qualified opinion with an ‘except for…’ wording

Q3
a. Pre-acceptance considerations of the review engagement (10marks)
Risk: the risk of giving an incorrect opinion.
Ensure pre-conditions are in places. Limited assurance. It’s management’s responsibilities to produce the forecast statements.
Auditor consideration: if we have sufficient resources, experience and skills
Commercial: fee charge, if it is profitable
Ethics: request independence confirmation.

b. Review of the forecast statements of profit or loss and cash flows (15 marks)
(i) evaluate the assumptions (6 marks)
(ii) design the principal audit procedures in the audit of cash flows. (9 marks)
Sales forecast
Search market price online
Inspect the fixed costs such as office building rents and employee salaries
Inspect the loan agreements to confirm the interest rate
Obtain WACC to recalculate the finance costs

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