ACCA F8 - Audit and Assurance Revision Kit 2016

102 The correct answer is:
Material
Yes
Financial statement impact
Gross profit may be overstated
Chestnut & Co was only appointed as auditors subsequent to Ash’s year end and hence did not attend the
year-end inventory count. Therefore, they have not been able to gather sufficient and appropriate audit
evidence with regards to the completeness and existence of inventory. This may mean that closing inventory
is over- or understated and this will have a resultant impact on gross profit and current assets.
Inventory is a material amount as it represents 21·3% (0·51/2·4m) of profit before tax and 5% (0·51/10·1m)
of revenue.
103 The correct answers are:
Review the internal audit reports of the inventory count to identify the level of adjustments made to the
records, in order to assess the reasonableness of relying on the inventory records for the purpose of the
year end audit.
Perform test counts of inventory in the warehouse and compare these first to the inventory records, and
then from inventory records to the warehouse, in order to assess the reasonableness of the inventory
records maintained by Ash.
Audit procedures should focus on testing the accuracy of the work performed by the internal audit
department at the year end in order to determine whether the year-end inventory quantity exists and is
complete.
Testing the accuracy of the aged inventory report will provide evidence over the valuation of inventory.
Reviewing the sales order book for February, March and April 20X5 could provide audit evidence as to the
quantity of inventory at the year-end but only if it is assessed to determine whether there would have been
sufficient inventory at the year end to fulfil customer demand.
104 The correct answer is:
Audit opinion
Qualified
Disclosure in the auditor’s report
Basis for qualified opinion
The auditor will need to express a modified opinion as they are unable to obtain sufficient appropriate
evidence in relation to inventory. The effect of this is material but not pervasive. Therefore a qualified ‘except
for’ opinion will be required.
The opinion paragraph will explain that the audit opinion is qualified ‘except for’. A basis for qualified opinion
paragraph will be required to explain the limitation in relation to the lack of evidence over inventory.
Humphries
105 D All the procedures are valid in identifying subsequent events occurring up to the date of the auditor’s
report.
106 D The flood damage does not provide evidence of conditions that existed at the year end, and therefore
is not an adjusting event as defined by IAS 10. On this basis, the inventory should not be written
down, but the nature and amount of expected uninsured losses may need to be disclosed. It is
incorrect to recognise a contingent asset in the 20X1 financial statements: contingent assets should
be disclosed, not recognised, and it should only be disclosed when an inflow of economic benefits is
probable (IAS 37).
107 A Writing to the customer is likely to be unproductive. In addition, it would only provide persuasive
evidence that the receivable existed at the year end, not that it was recoverable. Requesting a cash
flow forecast is irrelevant, as it does not give evidence as to the recoverability of the receivable itself
and there is no evidence that the going concern assumption needs to be revised.
108 C The probable payment and anticipated adjustment needed is $0.6 million representing 8% of profit
($0.6m/$7.5m x 100%). This is material and if management refuse to adjust for the provision, the
Answers 167