Please answer all 15 Multiple choice questions for subject Audit and Assurance..Student ID
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Main Examination Period 2021 – January – Semester A – Timed Examination
Module Code and Title: BUS354 Audit and Assurance
Date of exam: 11th January 2021
Duration and submission of exam: upload your completed exam paper to QMplus within 24
hours of downloading
Important: You must read the instructions on “Guidance on Timed Examinations” before
attempting this paper.
Students with Examination Access Arrangements (e.g. disabilities, specific learning
differences such as dyslexia, mental health diagnoses) must attach a completed SpLD coversheet.
The exam is divided into two sections:
Section A – Answer ALL 15 questions
Section B – Answer ONE question from a choice of TWO
If you answer more questions than specified, only the first answer (up
to the specified number) will be marked.
Declaration of academic integrity for Open Book Timed Examinations: In submitting your exam
paper you are formally confirming that during the allocated examination period you have had no
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represents your own thinking, and is entirely your own. Any information, concepts, or words that originate
from other sources are cited in accordance with the citation conventions accepted by the School of Business
and Management. You are aware of the serious consequences that result from improper discussions with
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If you encounter errors in the exam paper or are unable to upload the exam to the QMPlus
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Examiner: Andrew Wade
© Queen Mary University of London, 2021
Page 2
BUS354 (2021)
SECTION A
The following scenario relates to questions 1 – 5
You are an assistant manager at Ella & Partners and have been allocated to the audit of
Leafy Co, a listed company which has been an audit client for ten years and specialises in
manufacturing and selling essential oils. Zac Hough was the audit engagement partner for
Leafy Co and as he had completed seven years as the audit engagement partner, he has
recently been replaced by a new partner.
The current audit engagement partner has suggested that in order to ensure Ella &
partners maintain their expertise on the audit, Zac Hough could take on the role of
Engagement Quality Control Reviewer this year.
The total fees received by Ella & Partners for last year amounted to 17% of the firm’s total
fee income. The current year’s total fee income for audit and non‐audit services is
expected to be higher than last year. The audit senior manager for Leafy Co has just
announced that he is leaving Ella & Partners to join Leafy Co as a management
accountant.
Question 1
What is the most appropriate response to the suggestion that Zac Hough takes on the role
of Engagement Quality Control Reviewer?
A
Another partner has to be chosen to be the Engagement Quality Control Reviewer to
ensure the review is independent
B
Zac Hough could take the review role immediately but additional safeguards will be
required
C
Zac Hough should not serve as the Engagement Quality Control Reviewer for a
period of at least two years
D
Zac Hough could take the review role immediately with no additional safeguards
[3 marks]
BUS354 (2021)
Page 3
Question 2
Which TWO of the following would be the most appropriate responses in relation to fee
income received by Ella & Partners from Leafy Co?
A
Ella & Partners should reduce their fees so that no more than 15% of gross practice
income is generated from Leafy Co
B
If the recurring fees are likely to exceed 15% of annual practice income this year Ella
& Partners should resign as auditors of Leafy Co
C
If the recurring fees are likely to exceed 15% of annual practice income this year,
additional consideration should be given as to whether the non‐audit assignments
should be undertaken by the firm
D
If the fees do exceed 15% this should be disclosed to those charged with
governance at Leafy Co
[3 marks]
Question 3
Which ethical threat will be created when the audit senior manager commences
employment with the client and what action should be taken to manage the threat?
A
Intimidation – The manager should not be allowed to take the role of Management
Accountant
B
Familiarity – The composition of the audit team must be reviewed and changed as
appropriate
C
Confidentiality – The manager should not be allowed to take the role of
Management Accountant
D
Self‐review – The composition of the audit team must be reviewed and changed as
appropriate
[3 marks]
Turn Over
Page 4
BUS354 (2021)
Question 4
Which THREE of the following should the Internal Audit team of Leafy Co NOT be
involved in?
A
Observing controls being carried out by Leaf Co’s staff
B
Performing reconciliations
C
Designing and implementing internal controls to address deficiencies
D
Reporting internal control deficiencies directly to the board of directors
E
Authorising transactions
[3 marks]
Question 5
Which TWO of the following are fundamental principles as stated in the Code of Ethics
and Conduct?
A
Objectivity
B
Professional scepticism
C
Professional judgement
D
Independence
E
Confidentiality
[3 marks]
The following scenario relates to questions 6 – 10
Wrekin Co is a new audit client and you are currently planning the forthcoming audit.
You have been provided with planning notes from the audit engagement partner
following his meeting with the finance director.
Wrekin Co is a large jewellery company which owns a network of stores across the UK.
The company’s year‐end is 31 December. During the year the company introduced a
bonus scheme for its store managers. The bonus target was based on increasing the
level of sales in each store. This has been successful and revenue has increased by
15%.
This has partly been achieved by offering customers the chance to pay in instalments,
consequently the level of receivables is considerably higher than last year and there are
concerns about the creditworthiness of some customers.
BUS354 (2021)
Page 5
Question 6
Which of the following is an appropriate explanation of the audit risk relating to the bonus
for Wrekin Co’s store managers?
A
There is an increased risk of more irrecoverable debts
B
There is an increased risk of inappropriate cut‐off of sales
C
There is an increased risk of understatement of sales
D
There is an increased risk liquidity will fall
[3 marks]
Question 7
Which of the following procedures will be performed during a review of the financial
statements?
1
Enquiries of management
2
Obtain written representations from management
3
Analytical procedures
4
Tests of control
5
Cut of testing to ensure sales and purchases are recognised in the correct
period
[3 marks}
Question 8
Which of the following would NOT be an advantage of having an audit?
A
Fraud could be detected
B
Independent scrutiny of the financial statements should increase their reliability
C
Internal control deficiencies may be highlighted and recommendations given to
overcome these deficiencies
D
The accuracy of the financial statements will be confirmed
[3 marks]
Turn Over
Page 6
BUS354 (2021)
Question 9
Which of the following is NOT an appropriate audit response to the concerns about the
creditworthiness of some customers?
A
Extend cut‐off testing
B
Review controls over the collection of debts and assess their effectiveness
C
Discuss receivable balances over 90 days old with the finance director
D
Extend post year‐end cash receipts testing
[3 marks]
Question 10
Which of the following statements is true in relation to Wrekin Co being a new audit client
of the firm?
A
Inherent risk is increased as the firm has no cumulative knowledge or experience
B
The auditor may not be competent to perform the audit and should consider not
carrying on with the assignment
C
The auditor should contact the previous auditor to ask if there are any professional
matters of which they should be aware
D
The auditor will need to increase the quality control procedures performed due to
the increased risk
[3 marks]
BUS354 (2021)
Page 7
The following scenario relates to questions 11 – 15
You are an audit manager at Hall & Partners and the audit of Abby Co is nearly complete.
The draft financial statements currently show revenue of £70m and a profit before tax of
£8.2 million for the financial year ended 30 June 20X0.
You have been informed that the marketing director left Abby Co on 31 May 20X0 and
discovered that a legal case for unfair dismissal has been brought against Abby Co by the
marketing director.
During a discussion with the Human Resources (HR) director of Abby Co, you established
that the company received notice of the proposed legal claim on 2 July 20X6. The HR
director told you that Abby Co’s lawyers believe the maximum payout would be £200,000.
However, the directors do not intend to make any adjustments or disclosures in the
financial statements.
Question 11
Which of the following audit procedures should be performed to form a conclusion as to
whether the financial statements require amendment in relation to the unfair dismissal
claim?
1 Inspect relevant correspondence with Abby Co’s lawyers
2 Write to the marketing director to confirm the claim
3 Review the post year‐end cash book and bank statements for evidence the claim has
been settled
4 Request management confirms their views in a written representation letter
A
1, 2 and 3
B
1, 2 and 4
C
1, 3 and 4
D
2, 3 and 4
[3 marks]
Turn Over
Page 8
BUS354 (2021)
Question 12
Select the type of opinion that is appropriate if the unfair dismissal case is NOT adjusted
for or disclosed within the financial statements.
A
Unmodified
B
Qualified
C
Adverse
D
Disclaimer
[3 marks]
Question 13
Which TWO of the following are reasons why the auditor would need to modify the
auditor’s opinion?
A
A material inconsistency is found between the financial statements and the
other information contained in the annual report
B
They wish to draw attention to a matter that is fundamental to the users’
understanding of the financial statements
C
They find a material misstatement in the financial statements
D
They have been unable to obtain sufficient appropriate evidence to conclude that the
financial statements as a whole are free from material misstatement
E
They wish to restrict reliance on the auditor’s report by third parties
[3 marks]
Question 14
Which TWO of the following factors may indicate overvaluation of inventory at Abby Co?
A
A decrease in demand for Abby Co’s goods, requiring a price reduction
B
Increased inventory levels
C
Increased inventory turnover ratio
D
Inclusion of the third party inventory within Abby Co’s inventory balance
[3 marks]
BUS354 (2021)
Page 9
Question 15
Which THREE of the following should be considered when deciding whether to use
sampling?
A
The time the auditor has available to perform testing
B
Appropriateness of the population
C
The size of the population
D
Completeness of the population
E
The ease with which the testing can be performed
[3 marks]
Turn Over
Page 10
BUS354 (2021)
SECTION B
Question 1
You are the audit senior of Jo and Partners and are planning the audit of ThoughtPad and
Co for the year ended 30 December 20X0. The company produces laptops and tablets
and has been a client of your firm for four years.
You have begun planning for the audit and found out the following information.
In 20X0 they implemented a number of initiatives to try to improve results. This included
introducing a generous sales‐related bonus scheme for their salesmen, a high profile
advertising campaign and extending the credit period offered to customers.
Additional overheads have been included in inventory this year as they are considered to
be production related.
Financial Statement extracts from the year ended 31 December
DRAFT
ACTUAL
20X0
20W9
£m
£m
Revenue
46.0
36.0
Cost of Sales
(22.0)
(20.0)
–––––
–––––
Gross profit
24.0
16.0
Operating expenses
(15.0)
(8.0)
–––––
–––––
9.0
8.0
–––––
–––––
Inventory
4.2
3.2
Receivables
9.0
6.0
Cash

4.6
Trade payables
3.2
2.4
Overdraft
1.8

Profit before interest and taxation
BUS354 (2021)
Page 11
Requirements:
(a) ISA 210 ‘Agreeing the Terms of Audit Engagements’ provides guidance to auditors
on the steps they should take in accepting a new audit or continuing on an existing
audit engagement. It sets out a number of processes that the auditor should
perform including agreeing whether the preconditions are present.
Describe the PRECONDITIONS for an audit and the implications if they can’t be
obtained.
[5 marks]
(b) List TEN examples of matters the auditor may consider when obtaining an
understanding of the entity
[5 marks]
(c) Calculate SIX ratios, for BOTH years, which would assist in planning the audit of
ThoughtPad Co
[12 marks]
(d) Using the information provided and the ratios calculated, describe FIVE audit risks
and explain the auditor’s response to each risk in planning the audit of ThoughtPad
Co
[20 marks]
Note: Prepare your answer using two columns headed Audit risk and Auditor’s
response respectively.
(e) ISA 260 ‘Communication with Those Charged with Governance’ provides guidance
to auditors in relation to communicating with those charged with governance on
matters arising from the audit of an entity’s financial statements.
(i) Explain why it is important for auditors to communicate throughout the audit with
those charged with governance
[3 marks]
(ii) Identify FOUR examples of matters which the auditor may communicate to
those charged with governance.
[4 marks]
(f) From the 1st January 20X1 ThoughtPad Co will introduce a new inventory system,
explain THREE audit tests that should be performed in order to ensure the auditors
understand the system and that it is working effectively.
[6 marks]
Total [55 marks]
Turn Over
Page 12
BUS354 (2021)
Question 2
AJ Maxx Co is a clothing retailer which operates 50 stores throughout the country. The
company’s year end is 31 March 20X0. AJ Maxx Co has an internal audit department
which has undertaken a number of internal control reviews on cash controls at stores
during the year.
You are an audit supervisor of Louise & Partners and are reviewing the internal controls in
relation to cash receipts in preparation for the interim audit.
Each of AJ Maxx Co’s stores has four cash tills to take customer payments. All employees
based at the store are able to use each till. Employees do not have unique usernames
and passwords to use the tills.
Customers can pay using cash, debit or credit card. The cashier will place the cash or
debit/credit card receipt into the till after each transaction. At the end of each day, the tills
are reconciled to ensure sales equate to the cash plus debit/credit card receipts.
Cash is stored in the shop’s safe overnight and in the morning a security company collects
and deposits it with the bank.
The daily data is transferred to head office. On a daily basis the clerk:

Checks the daily data transfer has been completed for all stores

Agrees the cash transferred by the security company

Agrees the debit card payments to the bank statement

Agrees the credit card receipts have been received from the credit card company
On a monthly basis, the same clerk reconciles the bank statements to the cash book, any
unreconciled amounts are reported to the financial controller.
Trading conditions have been difficult and the overdraft of £4.2m has increased
significantly since last year when it was £1.3m. The directors have informed you that the
overdraft facility, which the company requires in order to operate on a daily basis, is due
for renewal in 3 months’ time, this is after the audit report is signed.
Requirements:
(a) State FIVE control objectives of PJ Maxx Co’s cash receipts system
[5 marks]
(b) Identify and explain FIVE KEY CONTROLS over PJ Maxx Co’s cash receipts which the
auditor may seek to place reliance on and describe TWO TESTS OF CONTROL the
auditor should perform to assess if each of these controls is operating effectively
[20 marks]
Note: Prepare your answer using two columns headed Key control and Test of control
respectively.
BUS354 (2021)
Page 13
(c) Identify and explain THREE DEFICIENCIES in PJ Co’s cash receipts system and
provide a recommendation to address each of these deficiencies.
[12 marks]
Note: Prepare your answer using two columns headed Control deficiency and Control
recommendation respectively.
(d) Describe EIGHT audit tests the auditor should perform in assessing whether or not PJ
Maxx Co is a going concern.
[8 marks]
(e) Discuss the issue and describe the impact on the auditor’s report of PJ Maxx Co of
adequate AND inadequate going concern disclosure
[10 marks]
[Total 55 Marks]
End of Paper

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