ACCA AA Syllabus D. Audit Evidence - Non-current Assets - Tangible - Past Papers ^{16 / 18}

Elounda Co manufactures chemical compounds using a continuous production process. Its year end was 31 July 20X6 and the draft profit before tax is $13·6 million. You are the audit supervisor and the year-end audit is due to commence shortly. The following matters have been brought to your attention.

(i) Revaluation of property, plant and equipment (PPE)
At the beginning of the year, management undertook an extensive review of Elounda Co’s non-current asset valuations and as a result decided to update the carrying value of all PPE. The finance director, Peter Dullman, contacted his brother, Martin, who is a valuer and requested that Martin’s firm undertake the valuation, which took place in August 20X5. (5 marks)

Required:
(a) Describe substantive procedures you should perform to obtain sufficient, appropriate audit evidence in relation to the above three matters.

Note: The mark allocation is shown against each of the three matters above.

Balotelli Beach Hotel Co (Balotelli) operates a number of hotels providing accommodation, leisure facilities and restaurants.

You are an audit senior of Mario & Co and are currently conducting the audit of Balotelli for the year ended 31 December 20X4. During the course of the audit a number of events and issues have been brought to your attention:

Non-current assets and depreciation
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the company’s hotels. Depreciation is charged monthly on all assets on a straight line basis (SL) and it is company policy to charge a full month’s depreciation in the month of acquisition and none in the month of disposal.

During the audit of non-current assets, the audit team has obtained the following extract of the non-current assets register detailing some of the new leisure equipment acquired during the year.

Extract from Balotelli’s non-current assets register

In order to verify the depreciation expense for the year, you have been asked to perform a proof in total. This will involve developing an expectation of the depreciation expense for the year and comparing this to the actual expense to assess if the client has calculated the depreciation charge for the year correctly.

What is the expected depreciation expense for the above assets for the year ended 31 December 20X4 and the resultant impact on non-current assets?

A. Depreciation should be $10,660, assets are understated
B. Depreciation should be $18,583, assets are understated
C. Depreciation should be $9,111, assets are overstated
D. Depreciation should be $12,549, assets are overstated

Balotelli Beach Hotel Co (Balotelli) operates a number of hotels providing accommodation, leisure facilities and restaurants.

You are an audit senior of Mario & Co and are currently conducting the audit of Balotelli for the year ended 31 December 20X4. During the course of the audit a number of events and issues have been brought to your attention:

Non-current assets and depreciation
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the company’s hotels. Depreciation is charged monthly on all assets on a straight line basis (SL) and it is company policy to charge a full month’s depreciation in the month of acquisition and none in the month of disposal.

The audit assistant who has been assigned to help you with the audit work on non-current assets has expressed some uncertainty over why certain audit procedures are carried out and specifically is unsure what procedures relate to the valuation and allocation assertion.

Which of the following audit procedures are appropriate to test the VALUATION assertion for non-current assets?

(1) Ensure disposals are correctly accounted for and recalculate gain/loss on disposal
(2) Recalculate the depreciation charge for a sample of assets ensuring that it is being applied consistently and in accordance with IAS 16 Property, Plant and Equipment
(3) Review the repairs and maintenance expense accounts for evidence of items of a capital nature
(4) Review board minutes for evidence of disposals during the year and verify that these are appropriately reflected in the non-current assets register

A. 1 and 2
B. 1, 3 and 4
C. 2, 3 and 4
D. 2 and 3 only

Baggio International Co (Baggio) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. The company’s year end is 30 September 20X5. You are an audit supervisor of Suarez & Co and are currently reviewing documentation of Baggio’s internal control in preparation for the interim audit.

Baggio’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed. Inventory is valued at the lower of cost and net realisable value.

Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Baggio has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Baggio’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months, Baggio has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

Required:
(b) Describe substantive procedures Suarez & Co should perform at the year end to confirm plant and equipment additions. (2 marks)

Vieri Motor Cars Co (Vieri) manufactures a range of motor cars and its year end is 30 June 20X5. You are the audit supervisor of Rossi & Co and are currently preparing the audit programmes for the year-end audit of Vieri. You have had a meeting with your audit manager and he has notified you of the following issues identified during the audit risk assessment process:

Land and buildings
Vieri has a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year period. During the year Vieri requested an external independent valuer to revalue a number of properties, including a warehouse purchased in January 20X5. Depreciation is charged on a pro rata basis.

Work in progress
Vieri undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory count is to be undertaken at the year end and Rossi & Co will attend. You are responsible for the audit of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be material. Vieri values WIP according to percentage of completion, and standard costs are then applied to these percentages.

Required:
(b) Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to:

(i) The revaluation of land and buildings and the recently purchased warehouse; and (6 marks)

Which of the following substantive procedures provides evidence over the COMPLETENESS of non-current assets?

A. Select a sample of assets included in the non-current asset register and physically verify them at the client premises
B. Review the repairs and maintenance expense account to identify any items of a capital nature
C. For assets disposed of, agree the sale proceeds to supporting documentation and cash book

Jackdaw Motor Cars Co (Jackdaw) manufactures a range of motor cars and its year end is 31 January 2015. You are the audit supervisor of Puffin & Co and are currently preparing the audit programmes for the year-end audit of Jackdaw. You have had a meeting with your audit manager and he has notified you of a number of issues identified during the audit risk assessment process.

Land and buildings
Jackdaw have a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year period.

During the year Jackdaw requested an external valuer to revalue a number of properties, including a warehouse purchased in May 2014. Depreciation is charged on a pro rata basis.

Work in progress
Jackdaw undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory count is to be undertaken at the year end and Puffin & Co will attend. You are responsible for the audit of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be material. Jackdaw values WIP according to percentage of completion, and standard costs are then applied to these percentages.

Required:
(b) Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to:

(i) The revaluation of land and buildings and the recently purchased warehouse; and (6 marks)

Balotelli Beach Hotel Co (Balotelli) operates a hotel providing accommodation, leisure facilities and restaurants.

Its year end was 31 October 2014. You are the audit senior of Mario & Co and are currently preparing the audit programmes for the year end audit of Balotelli. You are reviewing the notes of last week’s meeting between the audit manager and finance director where two material issues were discussed.

Depreciation
Balotelli incurred significant capital expenditure during the year on updating the leisure facilities for the hotel. The finance director has proposed that the new leisure equipment should be depreciated over 10 years using the straight-line method.

Food poisoning
Balotelli’s directors received correspondence in September from a group of customers who attended a wedding at the hotel. They have alleged that they suffered severe food poisoning from food eaten at the hotel and are claiming substantial damages. Balotelli’s lawyers have received the claim and believe that the lawsuit against the company is unlikely to be successful.

Required:
Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to the above two issues.

Note: The total marks will be split equally between each issue. (8 marks)

Garcia International Co (Garcia) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. The company’s year end is 30 September 2014. You are an audit supervisor of Suarez & Co and are currently reviewing documentation of Garcia’s internal control in preparation for the interim audit.

Garcia’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed. Inventory is valued at the lower of cost and net realisable value.

Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Garcia has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Garcia’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months Garcia has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

Required:
(b) Describe substantive procedures Suarez & Co should perform at the year end to confirm plant and equipment additions. (2 marks)

Minty Cola Co (Minty) manufactures fizzy drinks such as cola and lemonade as well as other soft drinks and its year end is 31 December 2013. You are the audit manager of Parsley & Co and are currently planning the audit of Minty.

You attended the planning meeting with the engagement partner and finance director last week and recorded the minutes from the meeting shown below. You are reviewing these as part of the process of preparing the audit strategy.

Minutes of planning meeting for Minty

Minty’s trading results have been strong this year and the company is forecasting revenue of $85 million, which is an increase from the previous year. The company has invested significantly in the cola and fizzy drinks production process at the factory. This resulted in expenditure of $5 million on updating, repairing and replacing a significant amount of the machinery used in the production process.

As the level of production has increased, the company has expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Minty and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end.

A new accounting general ledger has been introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months.

As a result of the increase in revenue, Minty has recently recruited a new credit controller to chase outstanding receivables. The finance director thinks it is not necessary to continue to maintain an allowance for receivables and so has released the opening allowance of $1•5 million.

In addition, Minty has incurred expenditure of $4•5 million on developing a new brand of fizzy soft drinks. The company started this process in January 2013 and is close to launching their new product into the market place.

The finance director stated that there was a problem in November in the mixing of raw materials within the production process which resulted in a large batch of cola products tasting different. A number of these products were sold; however, due to complaints by customers about the flavour, no further sales of these goods have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at cost of $1 million at the year end.

As in previous years, the management of Minty is due to be paid a significant annual bonus based on the value of year-end total assets.

Required:

Describe substantive procedures the audit team should perform to obtain sufficient and appropriate audit evidence in relation to the following three matters:

(i) The treatment of the $5 million expenditure incurred on improving the factory production process. (3 marks)

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website.

The company’s year end is 30 September 2012. You are an audit supervisor of Apple & Co and are currently reviewing documentation of Pear’s internal control in preparation for the interim audit.

Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed.

Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods.

Pear has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement.

Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

Required:

Describe substantive procedures you should perform at the year end to confirm each of the following for plant and equipment:

(i) Additions; and

(ii) Disposals. (4 marks)

Pineapple Beach Hotel Co (Pineapple) operates a hotel providing accommodation, leisure facilities and restaurants. Its year end was 30 April 2012. You are the audit senior of Berry & Co and are currently preparing the audit programmes for the year end audit of Pineapple. You are reviewing the notes of last week’s meeting between the audit manager and finance director where two material issues were discussed.

Depreciation

Pineapple incurred significant capital expenditure during the year on updating the leisure facilities for the hotel. The finance director has proposed that the new leisure equipment should be depreciated over 10 years using the straight-line method.

Required:

Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to the above two issues.

Note: The total marks will be split equally between each issue. (8 marks)

As part of your work as external auditor you are reviewing the non-current assets audit programme of the internal auditors and notice that the basis of their testing is a representative sample of purchase invoices. They use this to test entries in the non-current assets register and the updating movements on the annual budget.

Required:

State a more appropriate test to prove completeness of the non-current assets records, including the non-current assets register. (2 marks)

List FOUR assertions relevant to the audit of tangible non-current assets and state one audit procedure which provides appropriate evidence for each assertion. (4 marks)