MOCK TEST MÔN AA

MCQs
Case 1:
Bush-Baby Hotels Co (BBH) operates a chain of 18 hotels located across the country. Each hotel has
bedrooms, a restaurant and leisure club facilities. Most visitors to the restaurant and leisure club are
hotel guests; however, these facilities are open to the public as well. Hotel guests generally charge any
costs to their room but other visitors must make payment directly to the hotel staff.

During the year, senior management noticed an increased number of discrepancies in cash balances and
amounts of inventory that suggests that some employees have been stealing cash and goods from the
hotels. Management is keen to prevent this from recurring and is considering establishing an internal
audit department to undertake a fraud investigation.

The chief executive has suggested that one of the responsibilities of the internal audit department would
be to determine relevant benchmarks to compare the performance of a number of departments across a
range of relevant indicators as part of the scope of a wide-ranging project to improve results.

The finance director has suggested that the internal audit department could undertake inventory counts
at the restaurants of the 18 hotels. There is likely to be a significant level of inventory held at each hotel
and internal audit could then compare actual quantities to the hotels’ records.

Management agrees that the internal audit department should have as broad a role as possible, as this
will make the decision to recruit an internal audit department more cost effective.

1. Which of the following are additional functions that the internal audit department might be
required to undertake?

(1) Testing controls over cash receipts and cash counts

(2) Reviewing the computer environment and controls

(3) Monitoring compliance with laws and regulations

(4) Reviewing employees’ eligibility for promotions

A. 1 and 3 only

B. 2 and 3 only

C. 1, 2 and 3

D. 1, 2 and 4
Answer:

These are additional functions that could be undertaken by the internal audit department.

(4) is not because the role of internal audit is to evaluate and improve the effectiveness of risk
management, control and governance processes. Reviews of employees’ eligibility for promotion would
be undertaken by the HR department.

2. Which of the following are limitations of BBH establishing and maintaining an internal audit
department?

(1) That the internal auditors will be employees may impair their independence, as they may not report
issues to those charged with governance for fear of losing their job

(2) As there is no requirement for internal auditors to be qualified, there may be gaps in the experience
and technical knowledge of the department

(3) As BBH has not previously had such a department, there may be some resistance to employees
having their work reviewed, especially if the department’s first task is a fraud investigation

(4) As internal audit is required to be both objective and independent it can be difficult to find sufficient
personnel to staff the department

A. 1 and 2 only

B. 1, 2 and 3

C. 1, 2 and 4

D. 2, 3 and 4

Answer:

Each of these describe limitations of BBH establishing and maintaining an internal audit department.

(4) is not correct, because an internal audit department is not required to be independent. Although the
internal audit function can be outsourced, it is often in-house and therefore never truly independent.

3. Which of the following describes the internal audit assignment to determine benchmarks?

A. Regulatory compliance

B. Value for money

C. Operational information systems

D. Best value

Answer:
Value for money (VFM) is defined as the evaluation of management’s achievements in terms of
economy, efficiency and effectiveness of operations. VFM is the correct response as only this would deal
with “relevant benchmarks”, “indicators” and “performance” for a company whose primary objective is
to make a profit. (Best value audits apply to public sector and other entities that have a duty to deliver
services.)

4. Which of the following conclusions could be drawn by the internal audit department if it undertakes
the inventory counts?

(1) If actual quantities are generally lower than recorded quantities, there may be obsolete inventory

(2) If actual quantities for a specific hotel are lower than recorded quantities, this may indicate fraud

(3) If actual quantities are higher than recorded quantities, employees may not have been adequately
trained on how to record inventory movements

(4) If there are no differences, there are no inventory issues

A. 2 and 3 only

B. 1 and 3

C. 1 and 4

D. 2, 3 and 4

Answer:

(1) is not valid, because holding obsolete inventory would not necessarily result in any difference and
could result in higher physical quantities (e.g. if obsolete inventory is identified and adjusted on the
records but not physically removed). (4) is not valid, because even if there is no difference there could
still be inventory issues, such as obsolescence or fraud (involving falsification of the records as well as
theft of inventory).

5. The chairman recently received correspondence from a shareholder who is concerned that BBH
does not comply fully with corporate governance principles.

The board has compiled the following responses to the correspondence from the shareholder:

(1) The composition of our board, with four executive directors and two non-executive directors, allows
for strong governance because the executive directors understand the company’s decision making and
operations

(2) Our CEO, Daniel Brown, is a strong chairman of the board because of the perspective he brings as the
day-to-day leader of BBH.

(3) The inclusion of share options in the directors’ remuneration package helps to keep them focused on
the long-term results of BBH.

(4) One of the strengths of our board is the many years we continue to serve as directors, which gives us
a deep understanding of the company’s history
Which of the board’s responses to the e-mail from the shareholder reflect a correct understanding of
the principles of corporate governance?

A. 3 only

B. 1 and 2 only

C. 3 and 4

D. 1, 2 and 4

Answer:

The inclusion of share options in the directors’ remuneration is an element of good corporate
governance because it keeps the directors focused on the long-term.

The other options do not reflect the principles of corporate governance: At least half of the board should
be NEDs, so not (1);

there should be a clear division of responsibility between the CEO and the chairmans so not (2);

All directors should be subject to annual re-election by the shareholders, so not (4).
Case 2
It is 1 July 20X5. Balotelli Co operates a number of hotels providing accommodation, leisure facilities and
restaurants. You are an audit supervisor of Mario & Co, conducting the audit of Balotelli Co for the year
ended 31 December 20X4. The following information has been brought to your attention.

Non-current assets

Balotelli Co incurred significant asset expenditure during the year updating the leisure facilities at several
of the company's hotels. Depreciation is charged on all assets monthly on a straight-line basis (SL) and it
is company policy to charge a full month's depreciation in the month of acquisition and none in the
month of disposal. The audit team has obtained the following extract of the non-current assets register
detailing some of the new leisure equipment acquired during the year:

Date Description Cost Depreciation Charge for Carrying

($) policy the year amount

($) ($)

01/05/X4 15 treadmills 18,000 36 months SL 4,000 14,000

15/05/X4 20 exercise bikes 17,000 3 years SL 5,667 11,333

17/08/X4 15 rowing machines 9,750 36 months SL 2,167 7,583

19/08/X4 10 cross trainers 11,000 36 months SL 1,528 9,472

55,750 13,362 42,388

In order to verify the depreciation charge for the year the audit team has been asked to recalculate a
sample of the depreciation charges. The audit team has also been asked to carry out detailed testing on
the valuation of non-current assets.

Food poisoning - litigation

Balotelli Co’s directors received correspondence in November 20X4 from a group of customers who have
alleged that they suffered severe food poisoning from food eaten at the hotel and are claiming
substantial damages. Management have stated that based on discussions with their lawyers the claim is
unlikely to be successful.
Trade receivables

The audit team has obtained the following results from the external confirmation of trade receivables:

Customer Balance per Balance per Comment

list of customers customer

($) confirmation

($)

Willow Co 42,500 42,500

Cedar Co 35,000 25,000 Invoice raised 28 December 20X4

Maple Co 60,000 45,000 Payment made 30 December 20X4

Laurel Co 55,000 55,000 A balance of $20,000 is currently being disputed

by Laurel Co

6. Which of the following correctly calculates the depreciation expense for the new assets for the year
ended 31 December 20X4 and explains the resultant impact on non-current assets?

A. Depreciation should be $10,660, assets are understated

B. Depreciation should be $7,923, assets are understated

C. Depreciation should be $10,660, assets are overstated

D. Depreciation should be $7,923, assets are overstated

Answer: Depreciation should be calculated as:

Treadmills/exercise bikes = (18,000 + 17,000)/36 x 8 months = 7,778

Rowing machines/cross trainers = (9,750 + 11,000)/36 x 5 months = 2,882

Therefore, total depreciation is $10,660 and assets are currently understated as too much depreciation
has currently been charged.

7. Which FOUR of the following audit procedures are appropriate to test the VALUATION assertion for
non-current assets?

A. Review board minutes for evidence of disposals during the year and verify that these are
appropriately reflected in the non-current asset register

B. Agree a sample of additions included in the non-current assets register to purchase invoice and
cash book

C. Review the repairs and maintenance expense account for evidence of items of a capital nature
D. Recalculate the depreciation charge for a sample of assets ensuring that it is being applied
consistently and in accordance with IAS 16 Property, Plant and Equipment

E. Review physical condition of non-current assets for any signs of damage

F. Ensure disposals are properly accounted for and recalculate gain/loss on disposal

Answer:

Reviewing board minutes for disposals and verifying that they have been removed from the asset
register is a test for existence

Review the expense accounts for items of a capital nature is a test for completeness

All other tests are relevant for valuation

8. Which of the following audit procedures would provide the auditor with the MOST reliable audit
evidence regarding the likely outcome of the litigation?

A. Request a written representation from management supporting their assertion that the claim
will not be successful

B. Send a confirmation request to the lawyers of Balotelli Co to obtain their view as to the
probability of the claim being successful

C. Review the correspondence from the customers claiming food poisoning to assess whether
Balotelli Co has a present obligation as a result of a past event

D. Review board minutes to understand why the directors believe that the claim will not be
successful

Answer:

While all procedures would be valid in the circumstances only the written confirmation from the
company's lawyers would allow the auditor to obtain an expert, third party confirmation on the
likelihood of the case being successful. This would provide the auditor with the most reliable evidence in
the circumstances

9. Which TWO of the following are benefits of external confirmation procedures on trade receivables?

A. It provides evidence from an independent external source

B. It provides sufficient appropriate evidence overall balance assertions

C. It improves audit efficiency as all customers are required to respond

D. It improves the reliability of audit evidence as the process is under the control of the auditor

Answer:
As per ISA 505 External Confirmations, the evidence obtained from confirming parties should be reliable
as it is from an external source and the risk of management bias and influence is restricted due to the
process being under the control of the auditor.

Customers are not obliged to answer and often confirmation requests have a very low response rate.
External confirmation does not provide evidence over the valuation assertion for receivables.

10. Which of the following statements in relation to the results of the trade receivables circularisation
is TRUE?

A. No further audit procedures need to be carried out in relation to the outstanding balances with
Willow Co and Laurel Co

B. The difference in relation to Cedar Co represents a timing difference and should be agreed to a
pre year-end invoice

C. The difference in relation to Maple Co represents a timing difference and should be agreed to
pre year-end bank statements

D. Due to the non-reply, the balance with Oak Co cannot be verified and a different customer
balance should be selected and circularised

Answer:

Willow Co - external confirmation has confirmed the balance and no further work on existence is
required.

Cedar Co - Represents an invoice in transit and therefore should be confirmed to a pre year end invoice
to verify that it is a legitimate timing difference.

Maple Co - Represents a payment in transit and should be agreed to post year end payment to confirm
that it is a legitimate timing difference.

Laurel Co - Customer is disputing the balance and therefore the need for an allowance against the
balance should be assessed.
Case 3
The following scenario relates to questions 11–15

It is 1 July 20X5. You are an audit manager in Shifu & Co responsible for the audit of Panda Co for the
year ended 31 March 20X5. The draft financial statements show revenue of $55 million and profit before
taxation of $5.6 million. Panda Co manufactures chemicals and has a factory and four offsite locations
for finished goods. The final audit is almost complete and the financial statements and auditor’s report
are due to be signed next week.

The following two events have occurred subsequent to the year ‐end. No amendments or disclosures
have been made in the financial statements in respect of the two events.

Event 1 – Defective chemicals

Chemicals are manufactured up to one month before despatch to enable Panda Co to undertake
extensive quality control checks prior to despatch. Testing on 3 April 20X5 found that a batch of
chemicals produced in March 20X5 was defective. The cost of this batch was $850,000. In its current
condition it can be sold at a scrap value of $100,000 with selling costs of $1,000. The costs of correcting
the defect are too significant for Panda Co’s management to consider this an alternative option.

Event 2 – Explosion

An explosion occurred at the smallest of the four offsite storage locations on 20 April 20X5. This resulted
in some damage to inventory and property, plant and equipment. Panda Co’s management have
investigated the cause of the explosion and believe that they are unlikely to be able to claim on their
insurance. Management of Panda Co has estimated that the value of damaged inventory and property,
plant and equipment was $900,000 and it now has no scrap value.

11: Which of the following statements correctly describes Shifu Co's responsibility in relation to
subsequent events occurring between the date on which the auditor's report is signed and the date on
which the financial statements are issued?

A. Shifu Co should obtain sufficient and appropriate audit evidence and design audit procedures to
ensure that all subsequent events are identified

B. Shifu Co should obtain a list of subsequent events from the directors of Panda Co and include
these in the written representation letter

C. Shifu Co has no duty to perform any procedures after the date on which the auditor's report is
signed and therefore any subsequent events in this period will be dealt with in next year's audit

D. Shifu Co should discuss any subsequent events they become aware of with the directors of
Panda Co to determine whether the financial statements need amended
Answer:

This question tests knowledge of ISA 560 Subsequent Events and demonstrates the importance of having
a detailed understanding of the ISAs. While the auditor is not required to perform specific procedures
after the signing of the auditor’s report, if information comes to light between the signing of the
auditor’s report and the date the financial statements are issued, the auditor is required to discuss the
matter with

management and determine whether the financial statements should be amended.

Option A sets out the auditor’s responsibilities in the period between the year end and the date the
auditor’s report is signed.

The auditor is required to obtain written representations in respect of subsequent events but this would
have been obtained prior to the auditor’s report being signed. Therefore, B is not a valid response.

While the statement in C correctly identifies that the auditor has no duty to perform subsequent events
procedures after the auditor’s report is signed, it is not always the case that events in this period will be
dealt with next year as in certain circumstances the current year financial statements may be amended.

12. Which THREE of the following procedures should now be performed by the auditor of Panda Co?

A. Obtain written representation from management confirming all subsequent events have been
communicated to the auditor

B. Inspect purchase invoices to confirm the cost of the defective inventory

C. Review the most recent quality control reports in to identify other instances of defective
inventory included within inventory at 31 March 20X5

D. Obtain a schedule of assets damaged in the explosion to determine the amount of loss incurred

E. Review correspondence with the insurance company regarding the likelihood of a successful
claim

Answer:

A written representation must be obtained in respect of subsequent events. A breakdown of the

damaged items would be obtained to determine the value of assets damaged in the explosion. A review
of correspondence with the insurance company will be required to determine the value of any possible
reimbursement as this will affect the amount of loss incurred which will need to be disclosed.

The auditor will have performed cost and net realisable value testing during the final audit. These
procedures would not need to be repeated.

Reviewing the most recent quality control reports would not identify defects in inventory held at 31
March 20X5 as they will relate to inventory due to be despatched in July as quality control checks are
performed one month prior to despatch.

13. Which of the following statements is TRUE in respect of the storage explosion?
A. The value of the assets damaged should be written down

B. The directors should include a disclosure note detailing the impact to the company

C. The insurance claim should be recognised as a contingent asset

D. As the explosion occurred after the year end it will have no impact on the auditor’s report

Answer:

The condition causing the damage occurred after the year-end therefore the event is non-adjusting.

A non-adjusting event must be disclosed as it is material ($900,000/ $5,600,000 = 16.07% > 5%). If
disclosure is required but not made the financial statements will be materially misstated which will
impact the auditor’s report.

The amount from the insurance company are unlikely to be paid through investigated the cause of the
explosion.

14. Assuming no amendments are made to the financial statements, which of the following will be
included in the auditor’s report for Panda Co

A. Basis for qualified opinion

B. Adverse opinion

C. Emphasis of matter paragraph

D. Key audit matter paragraph

Answer:

Both events are material and require amendment. The misstatements are not pervasive as they do not
represent a substantial proportion of the financial statements. A qualified opinion is appropriate. The
basis for qualified opinion will explain the reason for the qualified opinion and quantify the financial
effects of the misstatements on the financial statements.

As the misstatements are not pervasive an adverse opinion is not appropriate. As Panda Co is not listed a
key audit matter paragraph is not appropriate.

An emphasis of matter paragraph is not appropriate as this is used to draw the user’s attention to a
matter correctly disclosed in the financial statements which is not the case here

15. The two issues will be included in a written representation from management. All audit work will be
finished by 31 July 20X5. The auditor's report is due to be signed by Shifu Co on 28 September 20X5.
Panda Co's board plans to issue the financial statements on 21 October 20X5 which will be followed by
an annual general meeting on 30 October 20X5.

Which of the following would be the most appropriate date for the directors of Panda Co to sign the
written representation?
A. 31 July 20X5

B. 28 September 20X5

C. 21 October 20X5

D. 30 October 20X5

Answer:

In this requirement extra information is provided in addition to the main scenario. Where this type of
information is provided candidates must ensure that they read it carefully before attempting the
question. This question requires candidates to apply their knowledge of ISA 580 Written
Representations. The ISA states that the date of written representations must be as near as practicable
to, but not after the date of the auditor’s report. The auditor’s report is due to be signed on 28
September 20X5, therefore this would be the most appropriate date for the directors to sign the written
representation.
Section B:
Case 1:
It is 1 July 20X5. You are an audit supervisor of Brooklyn & Co and are planning the audit of Harlem Co
for the year ending 30 September 20X5. The company has been a client of your firm for several years and
manufactures car tyres, selling its products to wholesalers and retailers. The audit manager attended a
planning meeting with the finance director and has provided you with the following notes of the
meeting and financial statement extracts:

Planning meeting notes

Harlem Co sells approximately 40% of its tyres to wholesale customers. These customers purchase goods
on a sale or return basis. Under the terms of the agreement, wholesale customers have 60 days during
which any returns can be made without penalty. The finance director has historically assumed a return
rate of 10%, however, he now feels that this is excessive and intends to change this to 5%.

The company purchased a patent on 30 September 20X4 for $800,000, which was capitalised in the prior
year as an intangible asset. This patent gives Harlem Co the exclusive right to manufacture specialised
wet weather tyres for four years. In preparation for the manufacture of the wet weather tyres, this year
the company conducted a review of its plant and machinery. As part of this review, surplus items of plant
and machinery were sold, resulting in a loss on disposal of $160,000.

In May 20X5, the financial controller of Harlem Co was dismissed after it was alleged that she had carried
out a number of fraudulent transactions against the company. She has threatened to sue the company
for unfair dismissal as she disputes the allegations. The company has only recently started to investigate
the extent of the fraud in order to quantify the required adjustment.

A problem occurred in June 20X5, during production of a significant batch of tyres, which affected their
quality. The issue was identified prior to any goods being dispatched and management is investigating
whether the issues can be rectified and the tyres can subsequently be sold.

Harlem Co’s finance director has informed you that in March 20X5 a significant customer was granted a
payment break of six months, as it has been experiencing financial difficulties. Harlem Co maintains an
allowance for trade receivables and it is anticipated that this will remain at the same level as the prior
year.

The report to management issued by Brooklyn & Co following last year’s audit highlighted significant
deficiencies relating to Harlem Co’s purchases cycle.

The finance director has informed you that the company intends to restructure its debt finance after the
year end and will be looking to consolidate its loans to reduce the overall cost of borrowing. As a result
of the planned restructuring of debt, Harlem Co has not paid its shareholders a dividend this year,
choosing instead to undertake a bonus issue of its $0.50 equity shares.

You have been asked by the audit manager to complete the preliminary analytical review and she has
provided you with the following information:
Financial statement extracts for year ending 30 September

The audit assistant has already calculated some key ratios for Harlem Co which you have confirmed as
accurate. She has ascertained that the trade receivables collection period has increased from 38 to 51
days.

Requirements:

(a) Describe the auditor’s responsibilities in relation to the prevention and detection of fraud and error.
(4 marks)
(b) Calculate the FOUR ratios listed in the table below, for BOTH years, to assist you in planning the
audit of Harlem Co.
Note: Formulas are NOT required to be shown. (4 marks)

Ratio 20X5 20X4

Gross profit margin
Inventory holding period
Gearing
Interest cover

(c) Using the information provided and the ratios calculated, describe EIGHT audit risks and explain the
auditor’s response to each risk in planning the audit of Harlem Co. (16 marks)

Case 2:
This scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Rocky & Co, reviewing extracts from the internal
controls documentation in preparation for the interim audit of Windom Co. The company's year end is
30 September 20X5. The company provides training services for individuals looking to become qualified
engineers. Windom Co's customers are the employers that send their employees for training on a
weekly basis. Windom Co runs classes in its 45 training centres across the country.
The company has a small internal audit (IA) department, which has experienced significant staff
shortages and is currently under-resourced. This has resulted in a reduction in their programme of work
for the year in many areas.
Purchases
The company has a purchasing department based at its head office. When raw materials are required,
the
production supervisors submit a requisition form to the purchasing department. A multi-part purchase
order is generated and the Purchasing manager authorises all orders up to $5,000. Orders over $5,000
are
authorised by the purchasing director.
The warehouse team processes goods received from suppliers. They agree the goods received to the
purchase order and check the quantity and the quality of the goods. On completion of those checks a
goods received note (GRN) is produced. One copy of the GRN is then signed and filed in the warehouse.
Another copy of the GRN is sent to the finance department.
A payables ledger clerk logs the purchase invoices in batches of 20 into the purchase day book utilizing
control totals. A batch control sheet is completed for each set of 20 invoices and the clerk signs to
evidence
the checks undertaken.
Supplier statement reconciliations are performed on a monthly basis. All differences are fully
investigated, and the financial controller reviews these reconciliations. Invoices are paid in accordance
with the supplier's credit terms. The finance director authorises the bank transfer payment list for
suppliers having first agreed the amounts to be paid to supporting documentation and having reviewed
the list for duplicate payments.
Non-current assets
Windom Co's training centres are either owned by the company or are held under a long- term lease.
The company also has a head office and central warehouse for storage of training materials. Each
training centre is set up as a separate department and is given an annual capital expenditure budget but
some departments have already significantly exceeded their annual budgets.
Part of the work which Windom Co's IA department is required to carry out is a comparison of the assets
per the non-current assets register and those physically present in each of the centres. This year's
programme of visits, which has been planned and carried out on the same basis as previous years,
means that by the year end IA will only have visited the four largest centres and five of the other centres
randomly selected.
Sales and bank
After passing a credit check, new customers are set up in the receivables ledger master file and a credit
limit is set by the sales director. The credit limits then remain unchanged in the system unless a review is
requested by the customer.
Each new customer is allocated a client services manager from Windom Co, who is responsible for
managing the customer relationship and maximising sales. Standard credit terms for customers are 30
days and on a monthly basis sales invoices which are over 90 days outstanding are notified to the
relevant client services manager to chase payment directly with the customer.
Requirements:

Auditors are required, under ISA 265 Communicating Deficiencies in Internal Control to Those Charged
with Governance and Management, to communicate in writing to those charged with governance any
significant deficiencies in internal control.

(a) Describe FOUR matters the auditor may consider in determining whether a deficiency in internal
control is significant. (4 Mark)

b. In respect of the Purchase System of Windom Co:

(i) Identify and explain FOUR KEY CONTROL on which the auditor may seek to place reliance; and

(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these key controls is
operating effectively

(Note: Marks will be equally split between each part) (8 marks)

c. Identify and explain FOUR DEFICIENCIES in Windom Co’s in NCA & SALES system and provide a
recommendation to address each of these deficiencies (8 marks)

During the year, the Chair of Windom Co resigned due to his other commitments and Fred Johnson, who
is the chief executive of the company, took over this role. Fred has recently written to all shareholders to
inform them that any questions or comments they may have could only be raised at the company’s
annual general meeting and that any other communication with the board is not possible.

The executive directors' remuneration is set by the remuneration committee. The non-executive
directors’ remuneration is set by the board and is based on pre-tax profit targets which are agreed by the
board at the start of each financial year. As the board is of the view that the internal control environment
is very effective, an audit committee has not been established.

(d) Describe THREE corporate governance deficiencies faced by Windom Co and provide a
recommendation to address each deficiency to ensure compliance with corporate governance
principles.

(6 marks)

Case 3:
It is 1 July 20X5 and you are an audit manager of Spadefish & Co and you are currently responsible for
the audits of two existing clients:

Encore Co is a waste management company, supplying its services to a variety of governmental and
business organisations. Encore Co's draft profit before tax is $5.3m (20X4: $4.6m) and total assets are
$40.1m (20X4: $33.9m). You have been provided with the following information regarding the draft
financial statements.
Marlin Co is a distributor of electronic goods and its year ended on 30 April 20X5. The audit is almost
complete and the auditor's report is due to be signed shortly.

The following matters have been brought to your attention for each company.

Encore Co - Vehicle additions and disposals

On 1 February 20X5, Encore Co replaced 20 of its recycling vehicles. The old vehicles had a carrying
amount of $1.8m, as recorded in the non-current assets register and were given in part-exchange against
new vehicles costing $4.6m. Cash consideration of $3.9m was also paid.

Encore Co - Potential breach of transport regulations

In March 20X5, a former employee of Encore Co made a complaint to the transport authority, alleging
that Encore Co has breached the regulations concerning maximum driving hours and compulsory rest
breaks for drivers on a number of occasions. The transport authority has launched an investigation but
the directors of Encore Co are not intending to disclose this issue or make any provision as they do not
believe that the potential fine, which is $50,000 per breach, is material.

Marlin Co - Going concern

During the year under audit Marlin Co has consistently paid a number of its suppliers significantly later
than usual and only after several reminders. As a result some of its suppliers have withdrawn credit
terms meaning the company must pay cash on delivery. The company has also just received notification
that its main supplier who provides the company with over 60% of its specialist electrical equipment has
ceased to trade.

The overdraft has increased significantly over the year and the directors have informed you that the
overdraft facility is due for renewal next month, and they are confident it will be renewed. The directors
have decided that in order to conserve cash, no final dividend will be paid in 20X5.

Requirement:

(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Encore Co’s vehicle additions and disposals. (6 marks)
(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to potential breach of transport regulation by Encore Co. (6 marks)
(c) Identify and explain THREE potential indicators that Marlin Co is NOT a going concern. (3 marks)
(d) Describe the audit procedures the auditor should perform in assessing whether or not Marlin Co is
a going concern. (5 marks)