Paper F8 (INT)

ALL FIVE questions are compulsory and MUST be attempted
1 Introduction
TinkerbellToys Co (Tinkerbell) is a manufacturer of children’s building blocktoys; they have been trading for over 35 years and they sell to a widevariety of customers including large and small toy retailers across thecountry. The company’s year end is 31 May 2011.
The company has alarge manufacturing plant, four large warehouses and a head office. Uponmanufacture, the toys are stored in one of the warehouses until theyare despatched to customers. The company does not have an internal auditdepartment.
Sales ordering, goods despatched and invoicing
Eachcustomer has a unique customer account number and this is used to entersales orders when they are received in writing from customers. Theorders are entered by an order clerk and the system automatically checksthat the goods are available and that the order will not take thecustomer over their credit limit. For new customers, a sales managercompletes a credit application; this is checked through a credit agencyand a credit limit entered into the system by the credit controller. Thecompany has a price list, which is updated twice a year. Largercustomers are entitled to a discount; this is agreed by the salesdirector and set up within the customer master file.
Once the orderis entered an acceptance is automatically sent to the customer bymail/email confirming the goods ordered and a likely despatch date. Theorder is then sorted by address of customer. The warehouse closest tothe customer receives the order electronically and a despatch list andsequentially numbered goods despatch notes (GDNs) are automaticallygenerated. The warehouse team pack the goods from the despatch list and,before they are sent out, a second member of the team double checks thedespatch list to the GDN, which accompanies the goods.
Oncedespatched, a copy of the GDN is sent to the accounts team at headoffice and a sequentially numbered sales invoice is raised and checkedto the GDN. Periodically a computer sequence check is performed for anymissing sales invoice numbers.

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.
Note: The mark allocation is shown against each of the three issues above. Audit report extracts are NOT required.
(20 marks)

(iii) Minnie Co’s main competitor has filed a lawsuit for $5m against them alleging a breach of copyright; this case is ongoing and will not be resolved prior to the audit report being signed. The matter is correctly disclosed as a contingent liability. (4 marks)

(ii) Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1·1m. (4 marks)

(i) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2·5m and the element charged to land only is $0·7m.(4 marks)

(c) The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.

(b) Describe the factors Daffy ; Co should consider when placing reliance on the work of the independent valuer. (4 marks)

Required:
(a) Explain the term ‘misstatement’ and describe the auditor’s responsibility in relation to misstatements. (4 marks)

5 You are the audit manager of Daffy ; Co and you are briefing your team on the approach to adopt in undertaking the review and finalisation stage of the audit. In particular, your audit senior is unsure about the steps to take in relation to uncorrected misstatements.
During the audit of Minnie Co the following uncorrected misstatement has been noted.
The property balance was revalued during the year by an independent expert valuer and an error was made in relation to the assumptions provided to the valuer.

(c) The audit engagement partner for Goofy Co has been in place for approximately six years and her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle him to shares in Goofy Co as part of his remuneration package. If NAB ; Co is appointed as internal as well as external auditors, then Goofy Co has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB ; Co and Goofy Co.
Required:
From the information in (c) explain the ethical threats which may affect the independence of NAB ; Co in respect of the audit of Goofy Co, and for each threat explain how it may be reduced. (6 marks)
(20 marks)