ACCA F8 - Audit and Assurance Revision Kit 2016

98 Rocks Forever
Text reference. Chapters 12 and 13.
Top tips. In part (a) it is important to maintain a focus on the company in the scenario and not just write down
general inventory risks. The high value of the inventory and the fact it is desirable gives rise to client specific risks.
Don’t forget to explain the reason for using your procedures in part (b). Simply listing the procedures will not gain
you the majority of the marks. We have included more points than necessary in our answer for your information,
but you should stick to your time allocation on this part before moving on to the next.
Part (c) asks for factors to consider when placing reliance on the work of the expert. For five marks you need about
five points so you will need to generate a few ideas. If you are not familiar with ISA 620 don't panic. You should be
able to produce a reasonable answer with a bit of common sense. For part (d) the key is your accounting
knowledge. Inventory should be valued at the lower of cost and net realisable value. Approach this part by thinking
about the ways in which the cost of inventory can be confirmed. Then think about the way in which net realisable
value can be established.
Easy marks. Overall this is a reasonably straightforward question looking at aspects of the audit with which you
should be familiar. All the marks are reasonably achievable, which is good news although you do need to apply your
knowledge to the scenario. Part (c) is probably the most straightforward as you can use your knowledge of ISA 620
Using the work of an auditor’s expert to structure your answer.
Marking scheme
(a)
(b)
(c)
Risks associated with inventory in Rocks Forever
Up to 1 mark per point to a maximum of 3
1 mark for each procedure 1 for explaining the relevance of the procedure up to a
maximum of 8
Factors to consider when placing reliance on UJ
Up to 1 mark per point to a maximum of 5
Marks
(d)
Audit procedures to ensure jewellery is valued correctly
Up to 1 mark per point to a maximum of 5
30
(a)
Risks associated with inventory in Rocks Forever
Rocks Forever is a company specialising in the sale of diamond jewellery. Inventory is therefore a material
figure in the accounts of Rocks Forever.
Specific risks associated with inventory in Rocks Forever include existence – the nature of the inventory
means that it is highly susceptible to theft and loss as it is a very attractive and valuable commodity.
Valuation is another key risk. The amount in the financial statements is material and the valuation of the
jewellery is subjective as it is reliant on the judgement of expert valuers. The inventory should be valued at
the lower of cost and net realisable value in accordance with accounting standards. However, given the
nature of the inventory and the fact that sales are subject to changing trends and fashions, this is a key risk
area.
Answers 161