Wednesday 9 December 2009
Reading and planning:
ALL FIVE 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
Paper F8 (INT)
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
(a) Explain the importance of audit planning and state TWO matters that would be included in an audit plan. (6 marks)
Redburn Co, a publisher and producer of books of poetry, has been a client of your ﬁrm of Chartered Certiﬁed Accountants for a number of years. The manager in overall charge of the audit has been discussing the audit plan with the audit team, of which you are a member, prior to commencement of the work. The audit manager has informed the team, among other things, that there has been a growing interest in poetry generally and that the company has acquired a reputation for publishing poets who are still relatively unknown. During your audit you determine:
Contracts with the poets state that they are given a royalty of 10% on sales. Free copies of the books are provided to the poets and to some organisations such as copyright libraries and to others, such as reviewers and university lecturers. No royalties are given on these free copies.
(ii) The computerised customer master ﬁle contains a code indicating whether a despatch is to earn a royalty for the author. This code is shown on the sales invoice and despatch note when they are prepared. (iii) A computerised royalties ﬁle is held, all entries therein bearing the invoice number and date. (iv) The company keeps detailed statistics of sales made, including trends of monthly sales by type of customer, and of colleges where its books are recommended as part of course material, based on reports from sales staff. (v) Bookshops have the right to return books which are not selling well, but about 10% of these are slightly damaged when returned. The company keeps similar records of returns as it does for sales. Required:
(b) Describe TWO procedures used to ensure that the sales statistics kept by the company may be relied upon. (4 marks)
(c) Describe THREE substantive tests you should perform to ensure that the royalties charge is accurate and complete, stating the objective of each test.
(d) A material ﬁgure in the statement of ﬁnancial position of Redburn Co is the amount attributed to inventory of books.
State TWO inherent risks that may affect the inventory ﬁgure and suggest ONE control to mitigate each risk. (4 marks)
(e) The management of Redburn Co have told you that inventory is correctly valued at the lower of cost and net realisable value. You have already satisﬁed yourself that cost is correctly determined. Required:
Deﬁne net realisable value;
(ii) State and explain the purpose of FOUR procedures that you should use to ensure that net realisable value of the inventory is at or above cost.
(a) ISA 500 Audit Evidence requires audit evidence to be reliable. Required:
List FOUR factors that inﬂuence the reliability of audit evidence.
(b) ISA 260 (Revised and Redrafted) Communication with Those Charged with Governance deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of ﬁnancial statements. Required:
Describe TWO speciﬁc responsibilities of those charged with governance;
(ii) Explain FOUR examples of matters that might be communicated to them by the auditor.