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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
INTERMEDIATE EXAMINATION - JANUARY 2006
Important - This question paper should be answered entirely in ONE Language only.
AUDIT AND ASSURANCE - PAPER ‘B’ AND PAPER ‘C’ (70 MARKS)
(Time allowed - 2 hours)
Answer the question in Paper ‘B’ and any three questions in Paper ‘C’.
Submit all workings. Begin each answer on a separate page.
PAPER ‘B’ (25 MARKS)
(Answer the following question in full)
Question No. 01
You are the senior of the audit of Goodgroup Ltd, which is a listed company. It has been in the
manufacturing business for more than a decade. For the financial year ended 31 December 2005, you have
received the following financial statements. You have decided to perform a preliminary analytical review
in order to identify the areas of audit concern. All figures are given in rupees thousand, unless stated
otherwise.
For the year ended 31 December 2005 2004
Revenue
Sale of goods 239,158 203,515
Rental income 695 676
239,853 204,191
Cost of sales (188,885) (165,987)
Gross profit 50,968 38,204
Other operating income - 530
Distribution costs (21,721) (14,371)
Administrative expenses (18,025) (14,373)
Other operating expenses (2,903) (1,610)
Profit/(loss) from operating activities 8,319 8,380
Finance costs (212) (738)
Income from associate 355 255
Profit/(loss) from operating activities before income tax and minority interests 8,462 7,897
Income tax expense (3,982) (2,928)
Net profit/(loss) from ordinary activities 4,480 4,969
Minority interests (249) (52)
Net profit/(loss) 4,231 4,917
Contd../
As at 31 December 2005 2004
ASSETS
Non-current assets
Property, plant and equipment 25,992 24,277
Investment properties 7,091 7,003
Intangible assets 7,498 2,857
Investment in associate 1,257 1,177
Investments 1,422 1,276
Deferred income tax asset 740 0
Pension asset 731 692
44,731 37,282
Current assets
Inventories 26,137 20,200
Trade and other receivables 17,889 10,782
Prepayments 35 364
Other assets 152 153
Cash and cash equivalents 8,724 11,330
52,937 42,829
TOTAL ASSETS 97,668 80,111
EQUITY AND LIABILITIES 2005 2004
Capital and reserves
Issued capital 12,575 10,000
Share premium 7,004 654
Other reserves (1,516) (602)
Accumulated profits 32,657 28,426
Total equity 50,720 38,478
Minority interests 566 331
Non-current liabilities
Interest-bearing loans and borrowings 13,139 9,964
Provisions 3179 2677
Government grants 1,000 678
Deferred income tax liabilities 3,131 2,702
20,449 16,021
Current liabilities
Trade and other payables 16,726 16,498
Current portion of interest-bearing loans and borrowings 2,630 4,638
Other liabilities 205 254
Government grants 1,070 1,012
Income tax payable 4,750 2,829
Provisions 552 50
25,933 25,281
TOTAL EQUITY AND LIABILITIES 97,668 80,111
Contd…/
(2)
Extracts of schedules:
Property, plant & Equipment
Land & assets
buildings Assets Total
Property, plant & equipment
Brought forward balance 11,727 12,550 24,277
Additions 1,666 10,157 11,823
Disposals (2,096) (4,734) (6,830)
Impairment - (235) (235)
Depreciation charge for the year (424) (3,035) (3,459)
Other adjustment 45 371 416
Carried forward balance 10,918 15,074 25,992
At 1 January 2005
Cost 13,402 21,550 34,952
Accumulated depreciation (1,675) (9,000) (10,675)
Net carrying amount 11,727 12,550 24,277
Accounting policy for depreciation states that no depreciation is provided in the year of purchase.
Depreciation rates for Land & Building 2%, while others at 10%. Company tax applicable at 35%.
Inflation rate 15%. Average bank lending rate 12%.
Required:
(a) State two (2) advantages and two (2) disadvantages of analytical review procedures. (6 marks)
(b) Perform a preliminary analytical review which will assist your audit planning at Goodgroup
Limited, and identify areas of concern.
(19 marks)
(Total 25 marks)
PAPER ‘C’ (45 MARKS)
(Answer any three questions)
Question No. 02
Nimal is the son of a long standing family proprietor. After completing his higher studies, he opted to
continue his father’s business of manufacturing ayurvedic products. Due to the need of expansion, he has
decided to seek an outside investor and funding from banks, with a view to incorporating his business as a
limited liability company. With the expansion he is not sure how to manage various requirements arising
from being a company which has borrowed funds.
You recently met Nimal at a social gathering and learn that he needs some service from your firm. Nimal is
very much concerned that an audit which he thinks does not add any value to his business and will fail to
bring any reward for his needs. You are required to explain to Nimal.
(a) what an assurance service is, (3 marks)
(b) its benefits, and (4 marks)
(c) in particular how an audit adds value to his business. (8 marks)
(Total 15 marks)
(3)
Question No. 03
(1) An Auditor should consider the appropriateness of the going concern assumption prior to
finalization of an audit.
(a) Name the three types of indicators the auditor should consider. (3 marks)
(b) Give 2 examples for each type of the indicators identified above. (6 marks)
(2) The auditor should consider the effect of subsequent events on the financial statements. What are
the obligations of the auditor with regard to;
(a) Events occurring up to the date of auditor’s report. (2 marks)
(b) Facts discovered after the date of the auditor’s report but before the financial statements
are issued.
(2 marks)
(3) When the aggregate uncorrected misstatements approach the materiality level, what are the two
steps the auditor should consider to reduce the risk?
(2 marks)
(Total 15 marks)
Question No. 04
You are the senior auditor of the audit group of the Fine Products Ltd (FPL), which operates 2
supermarkets in the western province. FPL is a privately held company with a share capital of Rs. 150
million. The two supermarkets are located in leased buildings.
As the senior of the engagement, you have been assigned with the responsibility of directing your staff in
performing tests of controls in the area of cash sales. As a result of the discussion you had with relevant
personnel, last year’s updated documentation, revealed the following aspects of the cash sales process.
Both supermarkets are equipped with barcode scanners which are used to record sales and returns.
Customer purchases are billed at the point of sale counters located at the entrance of each supermarket.
Sale transactions are recorded on cash register tapes and accumulated by the point of sale system for
nightly processing and posting to the general ledger. Cash collected at counters are deposited daily with the
lock boxes available in the office. In case of sales returns, voids and adjustments, approval of the manager
is obtained by providing a special password to the pop-up menu appearing on the cash register when a sale
return screen is activated.
At the end of each day, a physical count of all items in shelves is carried out. The sales clerk reconciles the
shelf quantities with sale quantities. The manager reviews the daily reconciliations and daily sale reports.
Required:
(a) In evaluating the cash sales process draft a brief note of risks (errors which can happen) and the
related financial statement assertions together with the controls available to prevent or detect such
risks.
(Hint: Students may prepare a table which details the risks, financial statement assertions, and the
related controls. Keep in mind that one control may act as a preventive or detective measure to one
or more of the risks identified by you.) In this regard you are required to identify 3 risks which
affect the financial statement assertions of sales.
(12 marks)
(b) Identify 3 significant controls in the process, for which you propose to carry out tests of controls
(3 marks)
(Total 15 marks)
(4)
Question No. 05
You are a member of the audit team of ABC Limited, a company manufacturing computers. As they have
to supply computers on short lead times ABC Ltd manufactures in excess of sales requirements every
month. They also have their own warehouse. Your manager has asked you to gather sufficient knowledge
of the business.
(a) List 4 sources you would use to obtain knowledge of ABC’s business
(2 marks)
(b) Your team will be making judgments about many matters through out the audit of ABC Ltd where
knowledge of the business is important . List 4 such areas.
(4 marks)
(c) Based on the information regarding the business of ABC Ltd;
- identify the important audit area that you think will have a significant impact on the
balance sheet;
(2 marks)
- explain why it is important that adequate audit evidence is obtained in the audit area
identified above.
(4 marks)
(d) During the initial discussions you have been informed by ABC Ltd that one of their key buyers
XYZ Ltd is facing serious financial difficulties. What are the two audit issues you would identify
based on this information.
(3 marks)
(Total 15 marks)
(5)
