(b) Discuss the advantages and disadvantages to both Goofy Co and NAB ; Co of outsourcing their internal audit department. (10 marks)

Goofy Co is considering using NAB ; Co to provide the internal audit services as well as remain as external auditors.
Required:

Goofy Co’s year end is 31 December, which is traditionally a busy time for NAB ; Co. Goofy Co currently has an internal audit department of five employees but they have struggled to undertake the variety and extent of work required by the company, hence Goofy Co is considering whether to recruit to expand the department or to outsource the internal audit department. If outsourced, Goofy Co would require a team to undertake monthly visits to test controls at the various shops across the country, and to perform ad hoc operational reviews at shops and head office.

4 You are an audit manager in NAB ; Co, a large audit firm which specialises in the audit of retailers. The firm currently audits Goofy Co, a food retailer, but Goofy Co’s main competitor, Mickey Co, has approached the audit firm to act as auditors. Both companies are highly competitive and Goofy Co is concerned that if NAB ; Co audits both companies then confidential information could pass across to Mickey Co.
Required:
(a) Explain the safeguards that your firm should implement to ensure that this conflict of interest is properly managed. (4 marks)

Required:
Using the information provided, describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Donald Co. (10 marks)
(20 marks)

The company receives bookings from travel agents as well as directly via their website. The travel agents are given a 90-day credit period to pay Donald Co, however, due to difficult trading conditions a number of the receivables are struggling to pay. The website was launched in 2010 and has consistently encountered difficulties with customer complaints that tickets have been booked and paid for online but Donald Co has no record of them and hence has sold the seat to another customer.
Donald Co used to sell tickets via a large call centre located near to their head office. However, in May they closed it down and made the large workforce redundant.

You are the audit senior and you have started planning the audit. Your manager has asked you to have a meeting with the client and to identify any relevant audit risks so that the audit plan can be completed. From your meeting you ascertain the following:
In order to expand their flight network, Donald Co will need to acquire more airplanes; they have placed orders for another six planes at an estimated total cost of $20m and the company is not sure whether these planes will be received by the year end. In addition the company has spent an estimated $15m on refurbishing their existing planes. In order to fund the expansion Donald Co has applied for a loan of $25m. It has yet to hear from the bank as to whether it will lend them the money.

3 (a) The auditor has a responsibility to design audit procedures to obtain sufficient and appropriate evidence. There are various audit procedures for obtaining evidence, such as external confirmation.
Required:
Apart from external confirmation:
(i) State and explain FIVE procedures for obtaining evidence and;
(ii) For each procedure, describe an example relevant to the audit of purchases and other expenses. (10 marks)
(b) Donald Co operates an airline business. The company’s year end is 31 July 2011.

2 (a) Auditors are required to document their understanding of the client’s internal controls. There are various options available for recording the internal control system. Two of these options are narrative notes and internal control questionnaires.
Required:
Describe the advantages and disadvantages to the auditor of narrative notes and internal control questionnaires as methods for documenting the system. (6 marks)
(b) ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of engagement letters and deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management.
Required:
(i) State the purpose of an engagement letter. (1 mark)
(ii) List SIX matters that should be included within an audit engagement letter. (3 marks)
(10 marks)

(a) Recommend SIX tests of controls the auditor would normally carry out on the sales system of Tinkerbell, and explain the objective for each test. (12 marks)
(b) Describe substantive procedures the auditor should perform to confirm Tinkerbell’s year-end receivables balance. (8 marks)
(c) Identify and explain controls Tinkerbell should implement to reduce the risk of fraud occurring again and, for each control, describe how it would mitigate the risk. (6 marks)
(d) Describe substantive procedures the auditor should perform to confirm Tinkerbell’s revenue. (4 marks)
(30 marks)