Part I Auditors' Responsibilities and Audit Approach

Part IV Completion of Audit and Reporting

Chapter 16 Contingencies and Subsequent Events

Question 69

Fashion Ltd, a listed company in Hong Kong, manufactures clothes and exports the clothes to different countries. You were the audit manager responsible for the audit of Fashion Limited for the year ended 31 December 2009.

A fire broke out and completely destroyed all the clothes in a warehouse under an operating lease on 10 February 2010. The remaining 20% clothes were kept in another warehouse. The company was sued by the customers for late delivery. The financial statements were approved by the directors on 12 March 2010.

Required:

(a) List the general audit procedures that should be performed to identify all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements. (8 marks)

(b) What specific audit procedures regarding the fire at the warehouse should be performed?

(6 marks)

(c) What kinds of audit reports may be issued? State your assumptions clearly. (6 marks)

(HKIAAT PBE Paper III Auditing and Information Systems June 2010 Q2)

Question 70

Intelligent Limited is a mobile phone manufacturer and wholesaler. The company produces and sells different models of mobile phones in different price ranges. A new model was launched in late June 2011, and many people bought this new model for their own use and as gifts for their friends. In early July 2011, quite a number of customers complained that the signal receiver of this model is not good and this news was spread around via the internet. Also, some magazines have published unfavourable comments on this new model phone.

Many retailers returned mobile phone of this model to Intelligent Limited in July 2011. Although no return term is provided in the sales agreement, the management accepted the return of these products due to consideration of the brand’s reputation. The year end date for Intelligent Limited is 30 June 2011. The management decided not to record the sales returns in year ended 30 June 2011as all the goods were returned by the customers after the year end date. No other adjustment is considered necessary. The auditor disagrees with the accounting treatment adopted by the management.

Required:

(a) List the general audit procedures to identify events occurring after the balance sheet date.

(8 marks)

(b) What specific audit procedures regarding the defects of the new phone model should be performed? (6 marks)

(c) What kinds of audit reports may be issued? State your assumptions clearly. (6 marks)

(HKIAAT PBE Paper III Auditing and Information Systems December 2011 Q4)

Question 71

You are assigned to audit one of the firm’s audit client, Supreme Beauty Limited (SBL). The principal activity of the company is the manufacturing and wholesaling of high-end home use facial machines. The company provides a free of charge one-year warranty with all items sold. In addition, customers can purchase extended warranties via the retailers. The retailers charge a commission for selling the extended warranties for SBL.

Required:

(a) For the sales of home use facial machines, what are the five assertions for this class of transactions? Briefly explain. (10 marks)

(b) What are the specific substantive procedures for the valuation of a provision for warranties? (5 marks)

(c) What are the specific substantive procedures for the accuracy of commission expenses?

(5 marks)

(HKIAAT PBE Paper III Auditing and Information Systems June 2014 Q4)

Question 72

Charming Limited (“Charming”), a listed company in Hong Kong, is a garment manufacturing company in China and exports its products to different overseas countries. You are the audit manager responsible for the audit of Charming for the year ended 31 December 2014.

A water leakage occurred and damaged a large portion of garments in Charming’s warehouse on 13 February 2015. Consequently, Charming was sued by its customers for late delivery. The management considered that the event happened after the year end date, therefore they determined not to account for nor make any disclosure in the financial statement for the year ended 31 December 2014.

Required:

(a) List the audit procedures that should be performed to identify all events up to the date of the auditors’ report that may require adjustment of, or disclosure in, the financial statements. (8 marks)

(b) What specific audit procedures regarding the water leakage at the warehouse should be performed? (6 marks)

(c) For the incident of the water leakage, what audit opinion(s) could be considered? State your assumptions. (6 marks)

(HKIAAT PBE Paper III Auditing and Information Systems June 2015 Q3)

Chapter 17 Final Review of Financial Statements

Question 73

An auditor should conduct a final overall review and evaluate the entity’s ability to continue as a going concern before forming an opinion on the financial statements.

Required:

(a) Who has the responsibility to carry out the review? (2 marks)

(b) What are the purposes of the final overall review? (4 marks)

(c) During the final overall review, the reviewer found that a company did not repay the bank loan which had expired before the year end date. The management of the company considered that it was still appropriate to apply the going concern assumption.

(i) What are the responsibilities of auditors regarding going concern? Specify the matters that the auditors should consider when planning as well as during the audit regarding going concern. (5 marks)

(ii) List five other possible financial indicators of a going concern. (5 marks)

(iii) What further procedures should be performed after identifying a delay in the repayment of a bank loan? (4 marks)

(HKIAAT PBE Paper III Auditing and Information Systems June 2009 Q4)

Question 74

The firm of BBD & Co., in which Bill Chan is employed, is the external auditor of Music Limited. Music Limited is a company engaged in the operation of 8 retail shops selling CDs, DVDs, Blu-rays and some other digital products in Hong Kong. Bill Chan has been in charge of this audit client for a few years.

After the year ended of 31 December 2012, both the holding company and Music Limited announced that they had financial difficulties for the continuation of the business and were looking for potential investors for Music Limited.

Bill Chan discussed the issue with the director, Mr. John Ng, of Music Limited. John said that the management believes the holding company can find investors ultimately and therefore the going concern assumption is still applicable for this year’s financial statements. However, the market in general believes that Music Limited and the holding company cannot survive in the future as no investor will invest in a declining industry.

Required:

(a) How does the going concern assumption affect a company in the preparation of its financial statements? (4 marks)

(b) What are the responsibilities of external auditors regarding the going concern assumption as used in the preparation of financial statements? (4 marks)

(d) What kinds of audit reports may be issued in the audit of Music Limited? State your assumptions clearly. (4 marks)

(HKIAAT PBE Paper III Auditing and Information Systems December 2013 Q4)

Chapter 18 Communication with Management and those Charged with Governance

Question 75

Audit committee is a committee consisting primarily of non-executive directors, which is able to view a company’s affairs in a detached and independent way and to liaise effectively between the main board of directors and the external auditors.

Required:

(a) What are the purposes and objectives of establishing audit committee? (6 marks)

(b) What are the functions of audit committee? (9 marks)

Chapter 19 Auditors' Report

Question 76

HKSA 560 (revised) requires that:

The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.

When the auditor becomes aware of events which materially affect the financial statements, the auditor should consider whether such events are properly accounted for and adequately disclosed in the financial statements.

Required:

(a) The following events occurred after the balance sheet date but before the audit report was prepared:

(i) declaration of a share dividend;

(ii) determination by the Inland Revenue Department of additional income tax due for a prior year;

(iii) disposal of fixed assets at a substantial profit; and

(iv) a lawsuit was filed against the audit client. In the opinion of legal counsel, there is a danger of a significant loss to the client.

Explain how each of the items might have come to the auditor’s attention. (8 marks)

(b) What is an unqualified opinion in the auditor’s report? (2 marks)

(i) an auditor was initially appointed by XYZ Limited on 1 February 2008 which was subsequent to the year end. In consequence, the auditor was unable to carry out audit procedures necessary to obtain adequate assurance regarding the quantities and condition of inventories and work in progress ($1,000,000) which appeared in the balance sheet at the year end date; and

(ii) subsequent to the date of the financial report as part of his audit procedures after the balance sheet date, an auditor learned of the bankruptcy of a client’s debtor; the client has no security for this debt ($1,000,000). The newspapers described the event in detail. The client did not make any provision for this debt.

What kind of audit opinion will be expressed in these circumstances? (4 marks)

(d) If the auditor disagrees with the amount of provision for doubtful debts which is considered as material in the financial statements, what are the key elements that would be included in the opinion section of the auditor’s report? (6 marks)

(HKIAAT PBE Paper III Auditing and Information Systems Pilot Q4)