Paper T8 (INT)

Certified Accounting Technician Examination

Advanced Level

Implementing Audit
Procedures
(International Stream)
Monday 8 December 2008

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

ALL FOUR questions are compulsory and MUST be attempted

1 Ruby Co produces kitchen units from factory premises, and prepares annual financial statements to 31 December. Its
board comprises four directors, there being a managing director and directors of sales, production and finance &
administration. The company employs only one buyer who reports directly to the managing director. Ruby Co exercises
the following controls over the acquisition of tangible non-current assets:
1. In October the directors and the buyer meet to discuss the tangible non-current asset requirements of each
functional area. At the end of the meeting an agreed list of acquisitions is approved and a copy is retained by all
attendees.
2. The buyer is then required to contact potential suppliers of the approved acquisitions to obtain confirmation of
availability, and the lowest price for inclusion in the company’s tangible non-current assets expenditure budget
for the forthcoming year.
3. In December the directors and the buyer meet again to formalise and approve the tangible non-current asset
expenditure budget. Following the meeting, a schedule is produced detailing approved acquisitions by category,
expected month of purchase and budgeted cost as obtained by the buyer. The schedule then forms the basis of
the tangible non-current assets expenditure budget of Ruby Co for the forthcoming year.
4. Throughout the new year, on a monthly basis, without prior consultation the buyer places orders with suppliers
ensuring that assets are acquired in the month as budgeted. As part of his remuneration package, the buyer is
entitled to bonus payments equating to 10% of any saving he can negotiate on budgeted costs. Consequently
assets may not necessarily be purchased from the suppliers contacted by the buyer for budgeting purposes.
5. The buyer normally places orders to purchase by a simple e-mail message. However where required by suppliers
he provides orders by way of a letter, which he signs.
6. Having placed an order, the buyer calculates his bonus entitlement and forwards a copy of the calculation
together with a copy of the order documentation to the managing director. He reviews this against his copy of the
budget, prior to authorising as appropriate and forwarding to the accounts department for payment of the bonus
as part of the buyer’s monthly salary.

Required:
(a) State FOUR objectives of the internal controls that should be exercised over the acquisition of tangible
non-current assets. (4 marks)

(b) With regard to the tangible non-current assets acquisition system of Ruby Co:
(i) Identify FOUR weaknesses in the system; (4 marks)
(ii) Describe the implications of each weakness identified; and (6 marks)
(iii) Recommend improvements to address the weaknesses. (6 marks)

(c) Explain the purpose of a tangible non-current assets register, describe its contents and state how it should
be used by a company. (5 marks)

(25 marks)

2
2 Emerald Co builds luxury yachts on a ‘made to order’ basis for a worldwide client base. Typically, it builds four fully
equipped and furnished yachts annually, with annual sales exceeding $80 million. The company’s operations are
based in a large dockside yard, which houses ancillary production and administration buildings. Although it maintains
inventory records throughout the year, Emerald Co relies on a physical count as a basis for the inclusion of an
inventory value in its annual financial statements.
As the company’s auditors, your firm is now planning for attendance at the year-end inventory count on 31 January
2009. Consequently the manager responsible for the audit has reviewed the adequacy of the inventory count
instructions and is satisfied with them.

Required:
(a) Identify and explain FOUR inherent risks associated with the inventory and work-in-progress of Emerald Co.
(10 marks)

(b) List THREE audit objectives of your firm’s attendance at the physical inventory count of Emerald Co on
31 January 2009. (3 marks)

(c) State EIGHT key procedures that members of your firm should carry out when attending the inventory count
of Emerald Co on 31 January 2009. (12 marks)

(25 marks)

3 Your firm Penn & Company has assigned you to the audit of the trade receivables of Opal Co for its financial year
ended 30 November 2008. Your tasks include the organisation of a trade receivables circularisation in respect of
balances as at that date.
Opal Co, is a book publishing company and there are in excess of 300 accounts in its trade receivables ledger, with
total balances outstanding of $960,000 as at 30 November 2008. Your audit senior has selected the customer
account balances for inclusion in the circularisation. Your first task is to prepare a draft positive circularisation letter
for review, approval and subsequent forwarding together with customer statements.

Required:
(a) Explain how your audit senior should have selected the sample of account balances for inclusion in the
circularisation. (5 marks)

(b) Explain the difference between a negative circularisation and a positive circularisation. (3 marks)

(c) Comment on the extent to which results from a negative circularisation may be relied upon to verify the
existence of year-end receivable balances and contrast this to the reliability of the results received from a
positive circularisation. (8 marks)

(d) State with reasons who should forward the circularisation letters to the customers of Opal Co. (3 marks)

(e) Prepare a draft positive circularisation letter to be forwarded with customer statements to the selected
customers of Opal Co. (6 marks)

(25 marks)

3 [P.T.O.
4 The board of directors of Topaz Co met recently to discuss the company’s audited annual financial statements, in
readiness for the company’s forthcoming annual general meeting.
At the board meeting, the following statements were made by the various directors:
1. Noting that the company’s auditors had recommended that the company should have an internal audit
department, the sales director enquired, ‘What are the differences between external auditors and internal
auditors?’
2. Whilst reading the auditors’ report, the production director commented, ‘The term true and fair is meaningless
audit jargon. For the fee they charge us, it would be reasonable for us to expect the auditors to confirm whether
the accounts are correct and error free.’
3. Recalling that the managing director and financial director had signed a letter of representation in connection with
the audited financial statements, the technical director stated, ‘I still don’t understand the purpose of that letter.’

Required:
(a) Explain the differences between external and internal auditors. (8 marks)

(b) Explain why the production director’s comments about ‘true and fair’ and his expectation of the auditors are
unreasonable. (9 marks)

(c) (i) Explain the purpose of a letter of representation and describe the circumstances in which auditors
should seek such a letter from the management of an audit client. (5 marks)
(ii) Describe the actions auditors should take if management refuses to provide them with written
representations. (3 marks)

(25 marks)

End of Question Paper