MOCK EXAMINATION
Certified Finance and Accounting Professional Stage
25th Nov 2021
3 hours – 100 marks
Additional reading time – 15 min
AUDIT, ASSURANCE AND RELATED SERVICES
Q.1 Your firm is the external auditor of Rehman Guard Ltd (RG), a Pakistan-based company, for the year
ending 30 September 2018. RG designs and sells wireless home security cameras to retailers.
Statement of profit or loss for the year ending 30 September (extract)
2018 2017 (Audited)
(Estimated) Rs. ‘000
Rs. ‘000
Revenue
- Contracts with retailers 132,750 124,120
- Premium service 49,780 35,500
182,530 159,620
Cost of sales (98,710) (97,770)
Gross profit 83,820 61,850
Profit before tax 15,470 30,925
Statement of financial position as at 30 September (extract)
Inventory 13,890 10,500
Homeowners purchase RG’s security cameras from a retailer, install them at their property and link them
to their smartphones via a free mobile app. Homeowners receive alerts in the app when a camera detects
motion at their property and they can also view video recordings made by the cameras. Some
homeowners use RG’s premium service. The premium service allows storage of larger volumes of video
recordings in the app compared with the basic plan, which is free.
You are the audit senior responsible for planning the audit. The engagement partner has asked you to
consider the following key areas of audit risk:
Revenue from retailers and the premium service
Inventory
Going concern
RG has contracts to supply 32 major retailers in Europe and North America with its security cameras.
Each contract with a retailer states the number of cameras to be supplied in the contract period and the
price to be paid to RG for each camera, denominated in the retailer’s local currency.
Homeowners who use the premium service pay RG on an annual basis in advance by entering their credit
card details in the app. The annual cost is denominated in the homeowner’s local currency.
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,RG’s security cameras are assembled by Pemmican Ltd (Pemmican) a company based in Asia. Pemmican
purchases components for the cameras, based on specifications set out in its contract with RG. Pemmican
delivers the assembled cameras to a shipping company in Asia which then ships them to one of RG’s 12
warehouses in Europe and North America. Ownership of the cameras passes to RG when Pemmican
delivers them to the shipping company. In accordance with the contract, Pemmican invoices RG a fixed
price, denominated in sterling, for each camera assembled.
RG maintains a perpetual inventory system at each of its 12 warehouses. Inventory at each warehouse is
counted once a year with one warehouse being selected for counting each month. Year-end inventory
included in the financial statements is based on the quantities recorded in the perpetual inventory system.
On 30 April 2018, an audit junior attended the inventory count at RG’s UK warehouse and noted the
following issues:
a) The movement of cameras to and from the warehouse continued throughout the count.
b) There was a large quantity of one camera, the GrG-I model, which appeared to be old with
damaged packaging. The UK warehouse manager said that he had not had time to review the
aged inventory report for many months.
c) There were several discrepancies identified between the perpetual inventory records and the
quantity of physical inventory counted at the warehouse. The UK warehouse manager explained
that adjustments are made to the perpetual inventory records for any discrepancies without further
investigation.
As part of your planning for the year ending 30 September 2018, you met with Susan Walker, RG’s
finance director, who provided you with the following information:
RG is currently discussing quality issues with Pemmican. Pemmican has been sourcing cheaper
components, which are inferior to those stipulated in its contract with RG, to improve
Pemmican’s profit margin.
During the year, RG received a significant number of complaints about its cameras
malfunctioning shortly after installation. In response to the resulting adverse media attention, RG
has publicly promised refunds to all affected homeowners. RG’s quality control team is currently
investigating whether the malfunctions are due to the inferior components used by Pemmican.
RG is currently renegotiating eight of its retail contracts which are due to expire by June 2019.
Susan is concerned that other retailers might exercise early termination clauses in their contracts
if the quality issues are not resolved quickly.
In August 2018, RG was the victim of a cyber-attack which prevented RG from operating for two
days. RG’s IT security department is currently investigating whether any personal data of
homeowners was stolen during the attack.
At the end of your planning meeting, Susan asked whether you would be interested in working for RG as
financial controller. The position has been vacant for many months. You are very interested in the offer
and intend to discuss this further with Susan.
Requirement:
a) Justify why revenue, inventory and going concern have been identified as key areas of audit
risk and, for each key area, describe the procedures that should be included in the audit plan to
address those risks. 20 marks
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, b) For each of the issues (a) to (c) noted by the audit junior, draft points for inclusion in your
firm's report to those charged with governance and management at RG. For each issue, state
the internal control deficiency, outline the possible consequence(s) and provide
recommendations to address the deficiency. 10 marks
Q.2
a) Your firm is performing an engagement to examine and provide assurance on Lake’s cash flow forecast
for the three years ending 30 September 2021. The forecast has been prepared by Lake’s directors in
support of a loan application. Lake’s bank requires the forecast to be examined and reported on by
independent accountants. The cash flow forecast has been prepared on the assumption that revenue will
grow by 8% pa. Your firm believes this is highly unrealistic because current revenue growth for Lake and
the industry in which it operates is 2% pa and 3% pa respectively. (5)
b) Your firm is the external auditor of Wild for the year ended 30 June 2021. In March 2021, Wild sold a
property to Holly James. Holly is Wild’s managing director. Wild’s directors have refused to disclose the
sale of the property to Holly in the financial statements for the year ended 30 June 2020. (4)
Required: For each of the four situations above, state, with reasons, the implications for your firm’s
audit or assurance reports.
Q.3 a) Your firm is the external auditor of Buddy Ltd (Buddy). The directors of Buddy discovered a fraud
soon after the auditor's report on the financial statements for the year ended 30 June 2021 was signed.
Some of Buddy’s employees had given unauthorised discounts on sales made to their friends and
families, which is not allowed by Buddy’s discount policy. The amounts were not material to the financial
statements but Buddy’s managing director has expressed concern that your firm did not discover this
fraud during the audit.
Outline the responsibilities of your firm and Buddy’s directors in respect of this fraud and reach a
conclusion as to whether those responsibilities were met. (5)
b) The testing of journal entries is one of the procedures used by external auditors to respond to the risk
of fraud at audited entities.
List the characteristics of journal entries that external auditors should select for testing to identify
any fraudulent activities. (4)
Q.4 ICAP has recently undertaken quality control reviews at your firm, including the inspection of a sample
of external audit files. It has reported the following matters to be addressed by your firm.
1. The recruitment section of your firm’s website states that commission will be paid to employees
for the successful generation of new business from audit and assurance clients.
2. Your firm has no policies in place in respect of staff and partners holding shares in client
companies.
3. From March 2016 to December 2017, your firm seconded a senior manager to Alonso Ltd
(Alonso) as Head of Internal Audit. The same individual is the senior manager responsible for the
external audit of Alonso for the year ending 30 September 2018.
4. On several external audit files, there was no evidence that the planned audit approach, scope of
the audit, ethical matters and timetable were communicated to those charged with governance at
the audited entity.
The report noted that your firm fully complied with the Money Laundering Regulations.
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Certified Finance and Accounting Professional Stage
25th Nov 2021
3 hours – 100 marks
Additional reading time – 15 min
AUDIT, ASSURANCE AND RELATED SERVICES
Q.1 Your firm is the external auditor of Rehman Guard Ltd (RG), a Pakistan-based company, for the year
ending 30 September 2018. RG designs and sells wireless home security cameras to retailers.
Statement of profit or loss for the year ending 30 September (extract)
2018 2017 (Audited)
(Estimated) Rs. ‘000
Rs. ‘000
Revenue
- Contracts with retailers 132,750 124,120
- Premium service 49,780 35,500
182,530 159,620
Cost of sales (98,710) (97,770)
Gross profit 83,820 61,850
Profit before tax 15,470 30,925
Statement of financial position as at 30 September (extract)
Inventory 13,890 10,500
Homeowners purchase RG’s security cameras from a retailer, install them at their property and link them
to their smartphones via a free mobile app. Homeowners receive alerts in the app when a camera detects
motion at their property and they can also view video recordings made by the cameras. Some
homeowners use RG’s premium service. The premium service allows storage of larger volumes of video
recordings in the app compared with the basic plan, which is free.
You are the audit senior responsible for planning the audit. The engagement partner has asked you to
consider the following key areas of audit risk:
Revenue from retailers and the premium service
Inventory
Going concern
RG has contracts to supply 32 major retailers in Europe and North America with its security cameras.
Each contract with a retailer states the number of cameras to be supplied in the contract period and the
price to be paid to RG for each camera, denominated in the retailer’s local currency.
Homeowners who use the premium service pay RG on an annual basis in advance by entering their credit
card details in the app. The annual cost is denominated in the homeowner’s local currency.
1|Page
,RG’s security cameras are assembled by Pemmican Ltd (Pemmican) a company based in Asia. Pemmican
purchases components for the cameras, based on specifications set out in its contract with RG. Pemmican
delivers the assembled cameras to a shipping company in Asia which then ships them to one of RG’s 12
warehouses in Europe and North America. Ownership of the cameras passes to RG when Pemmican
delivers them to the shipping company. In accordance with the contract, Pemmican invoices RG a fixed
price, denominated in sterling, for each camera assembled.
RG maintains a perpetual inventory system at each of its 12 warehouses. Inventory at each warehouse is
counted once a year with one warehouse being selected for counting each month. Year-end inventory
included in the financial statements is based on the quantities recorded in the perpetual inventory system.
On 30 April 2018, an audit junior attended the inventory count at RG’s UK warehouse and noted the
following issues:
a) The movement of cameras to and from the warehouse continued throughout the count.
b) There was a large quantity of one camera, the GrG-I model, which appeared to be old with
damaged packaging. The UK warehouse manager said that he had not had time to review the
aged inventory report for many months.
c) There were several discrepancies identified between the perpetual inventory records and the
quantity of physical inventory counted at the warehouse. The UK warehouse manager explained
that adjustments are made to the perpetual inventory records for any discrepancies without further
investigation.
As part of your planning for the year ending 30 September 2018, you met with Susan Walker, RG’s
finance director, who provided you with the following information:
RG is currently discussing quality issues with Pemmican. Pemmican has been sourcing cheaper
components, which are inferior to those stipulated in its contract with RG, to improve
Pemmican’s profit margin.
During the year, RG received a significant number of complaints about its cameras
malfunctioning shortly after installation. In response to the resulting adverse media attention, RG
has publicly promised refunds to all affected homeowners. RG’s quality control team is currently
investigating whether the malfunctions are due to the inferior components used by Pemmican.
RG is currently renegotiating eight of its retail contracts which are due to expire by June 2019.
Susan is concerned that other retailers might exercise early termination clauses in their contracts
if the quality issues are not resolved quickly.
In August 2018, RG was the victim of a cyber-attack which prevented RG from operating for two
days. RG’s IT security department is currently investigating whether any personal data of
homeowners was stolen during the attack.
At the end of your planning meeting, Susan asked whether you would be interested in working for RG as
financial controller. The position has been vacant for many months. You are very interested in the offer
and intend to discuss this further with Susan.
Requirement:
a) Justify why revenue, inventory and going concern have been identified as key areas of audit
risk and, for each key area, describe the procedures that should be included in the audit plan to
address those risks. 20 marks
2|Page
, b) For each of the issues (a) to (c) noted by the audit junior, draft points for inclusion in your
firm's report to those charged with governance and management at RG. For each issue, state
the internal control deficiency, outline the possible consequence(s) and provide
recommendations to address the deficiency. 10 marks
Q.2
a) Your firm is performing an engagement to examine and provide assurance on Lake’s cash flow forecast
for the three years ending 30 September 2021. The forecast has been prepared by Lake’s directors in
support of a loan application. Lake’s bank requires the forecast to be examined and reported on by
independent accountants. The cash flow forecast has been prepared on the assumption that revenue will
grow by 8% pa. Your firm believes this is highly unrealistic because current revenue growth for Lake and
the industry in which it operates is 2% pa and 3% pa respectively. (5)
b) Your firm is the external auditor of Wild for the year ended 30 June 2021. In March 2021, Wild sold a
property to Holly James. Holly is Wild’s managing director. Wild’s directors have refused to disclose the
sale of the property to Holly in the financial statements for the year ended 30 June 2020. (4)
Required: For each of the four situations above, state, with reasons, the implications for your firm’s
audit or assurance reports.
Q.3 a) Your firm is the external auditor of Buddy Ltd (Buddy). The directors of Buddy discovered a fraud
soon after the auditor's report on the financial statements for the year ended 30 June 2021 was signed.
Some of Buddy’s employees had given unauthorised discounts on sales made to their friends and
families, which is not allowed by Buddy’s discount policy. The amounts were not material to the financial
statements but Buddy’s managing director has expressed concern that your firm did not discover this
fraud during the audit.
Outline the responsibilities of your firm and Buddy’s directors in respect of this fraud and reach a
conclusion as to whether those responsibilities were met. (5)
b) The testing of journal entries is one of the procedures used by external auditors to respond to the risk
of fraud at audited entities.
List the characteristics of journal entries that external auditors should select for testing to identify
any fraudulent activities. (4)
Q.4 ICAP has recently undertaken quality control reviews at your firm, including the inspection of a sample
of external audit files. It has reported the following matters to be addressed by your firm.
1. The recruitment section of your firm’s website states that commission will be paid to employees
for the successful generation of new business from audit and assurance clients.
2. Your firm has no policies in place in respect of staff and partners holding shares in client
companies.
3. From March 2016 to December 2017, your firm seconded a senior manager to Alonso Ltd
(Alonso) as Head of Internal Audit. The same individual is the senior manager responsible for the
external audit of Alonso for the year ending 30 September 2018.
4. On several external audit files, there was no evidence that the planned audit approach, scope of
the audit, ethical matters and timetable were communicated to those charged with governance at
the audited entity.
The report noted that your firm fully complied with the Money Laundering Regulations.
3|Page
