ACCA F8 - Audit and Assurance Revision Kit 2016

(a)
ISA 265 includes examples of matters to consider when determining whether a deficiency in internal control
is a significant deficiency. These include:
The likelihood of the deficiencies resulting in material misstatements in the financial statements in the
future
The importance of the controls to the financial reporting process
The susceptibility to loss or fraud of the related asset or liability
The interaction of the deficiency with other deficiencies in internal control
The amounts exposed to the deficiencies
Top tips. In (a) you could have included the following factors:
The cause and frequency of the exceptions identified as a result of the deficiencies
The volume of activity that has occurred or could occur
The subjectivity and complexity of determining estimated amounts
However, only five were needed to pick up all of the available marks.
(b)
The Board of Directors
Greystone Co
15 Low Street
Members of the board,
Financial statements for the year ended 30 September 20X0
ABC & Co
Certified Accountants
29 High Street
8 December 20X0
We set out in this letter deficiencies in the purchases system which arose as a result of our review of the
accounting systems and procedures operated by your company during our recent audit. The matters dealt
with in this letter came to our notice during the conduct of our normal audit procedures which are
designed primarily for the purpose of expressing our opinion on the financial statements.
Determination of inventory levels
(i)
(ii)
(iii)
Deficiency
The purchasing manager determines store inventory levels without consulting those who are best
place to judge the local market; the store or sales managers.
Implication
Certain clothes and accessories may be initially over-ordered and may need to be sold at reduced
prices. This may also result in overvalued inventory (if held at cost) in the management accounts
and ultimately the financial statements. Also some inventory may not be ordered in enough volume
to meet demand and the reputation of Greystone may suffer.
Recommendation
The purchasing manager should consult (in a meeting or by conference call) the store managers
and a joint decision should be made on the initial inventory levels to be ordered for
clothes/accessories.
Re-ordering
(i)
Deficiency
Store managers are responsible for re-ordering through the purchases manager and it can take
four weeks for goods to be received.
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