ACCA paper f8 auditiing and assurance F8AA(INT)MT2A qs j08

Monitoring Test MT2A

Audit and Assurance
(International)
F8AA-MT2A-X08-Q

Time allowed

1.5 hours

All THREE questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.

Accountancy Tuition Centre Ltd

ATC
INTERNATIONAL


1

There are similarities and differences between the responsibilities of internal and external
auditors. Both internal and external auditors have responsibilities relating to the prevention,
detection and reporting of fraud, for example, but their responsibilities are not the same. Both
internal and external audit are part of an organisation’s overall corporate governance
arrangements. Sometimes, the responsibilities of internal auditors are out-sourced to external
organisations.
Required:
(a)

Explain the difference between the responsibilities of internal auditors and

external auditors for the prevention, detection and reporting of fraud and
error.
(7 marks)

(b)

Explain the role of internal audit in the context of:
(i)

corporate governance;

(3 marks)

(ii)

risk management;

(3 marks)

(iii)

organisational control.

(2 marks)

Your answer should include one example of how an internal audit department in a
manufacturing company might fulfil its role under each of the headings above.
(c)

Outline the issues that should be considered when an organisation decides to

out-source the internal audit function.
(5 marks)
(20 marks)

2

You are the auditor of Microprods for the year ended 31 March 2008. The company’s main
activity is assembling laptops using bought-in components. Detailed cost records are not kept
but the production director has estimated that each laptop costs $670 to assemble as follows:
$
600
12
58
___

Components
Labour
Overheads

670
___
During the year, Microprods started importing notebook computers from a Far Eastern
manufacturer. Turnover has been slow but the directors are optimistic and spent a
considerable amount on a New Year advertising campaign directed at the notebook market.
Inventory of notebook computers has been included in the accounts at a translated invoice
cost of $860 each.
All equipment is sold under a twelve-month warranty and the directors wish to provide
$50,000 against warranty claims. This amount is considered material to the accounts.
Your attendance at the year-end physical count and subsequent audit tests indicate that the
inventory was quantified correctly and that proper cut-off procedures were implemented.

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2


Required:
Describe the evidence you would seek to:
(a)

check the cost of assembled laptops;

(4 marks)

(b)

ascertain net realisable value of computer inventory;

(4 marks)

(c)

confirm the adequacy of the warranty provision.

(7 marks)
(15 marks)

3

You are the senior in charge of the audit of Phoenix, a private limited liability company,

which manufactures super alloys from imported zinc and aluminium. The company operates
three similar foundries at different sites. The draft accounts for the year ended 31 March 2008
show profit before taxation of $1·7m (2007 – $1·5m).
Your assistants have bought to your attention the following points:
(1)

A trade investment in 60,000 $1 ordinary shares of Pegasus, one of the company’s
major shipping contractors, is included in the statement of financial position at cost
of $80,000.
In May 2008, the published financial statements of Pegasus as at 30 September 2007
show only a small surplus of net assets. A recent press report now suggests that
Pegasus is insolvent and has ceased to trade.
Although dividends declared by Pegasus in respect of earlier years have not yet been
paid, Phoenix has included $15,000 of dividends receivable in its draft accounts as
at 31 March.
(6 marks)

(2)

Current liabilities include a new $500,000 provision for future maintenance. This
represents the estimated cost of overhauling the blast furnaces and other foundry
equipment. The furnaces were purchased five years ago and require their fire-brick
linings to be replaced every five years.
The overhaul is planned for August 2008 when all foundry workers take two weeks
annual leave.
(6 marks)

Required:
(a)

(b)

For each of the above two points:
(i)

comment on the matters that you would consider; and

(ii)

state the audit evidence that you would require your assistants to
obtain.
(12 marks)

Discuss the impact this may have on your audit report if the client were to
refuse to consider the recommendations you make.
(3 marks)
(15 marks)
End of Question Paper

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