Question 4 (a) According to ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements: 'When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.' Required: Discuss why the auditor should presume that there are risks of fraud in revenue recognition and why ISA 240 requires specific auditor responses in relation to the risks identified. [10 marks] (b) You are the manager responsible for the audit of Beecham Ltd, a supermarket owned and managed by a one man shareholder, Mr Peter Brown. The audit for the year ended 30 June 2017 is nearing completion and the draft financial statements recognise total assets of Rs 40 million and profit before tax of Rs 4 million. The audit senior has Page 5 of 6 Advanced Auditing - ACF3003 (5) left the following file notes for your consideration during your review of the audit working papers: Cash transfers During a review of the cash book, a receipt of Rs 500,000 was identified which was accompanied by the description 'BD'. Bank statements showed that the following day a nearly identical amount was transferred into a bank account held in a foreign country. When I asked the financial controller about this, he requested that I speak to Mr Peter, as he has sole responsibility for cash management. According to Mr Peter, an old friend of his, Navin, has loaned the money to the company to fund further expansion and the money has been invested until it is needed. Documentary evidence concerning the transaction has been requested from Mr Peter but has not yet been received. [10 marks] (ii) Legal dispute At the year end Beecham Ltd reversed a provision relating to an ongoing legal dispute with an ex-employee who was claiming Rs 200,000 for unfair dismissal. This amount was provided in full in the financial statements for the year ended 30 June 2016 but has now been reversed because Mr Peter believes it is now likely that Beecham Ltd will successfully defend the legal case. Mr Peter has not been available to discuss this matter and no additional documentary evidence has been made available since the end of the previous year's audit. The audit report was unmodified in the previous year. [10 marks] Required: Evaluate the implications for the completion of the audit, recommending any further actions which should be taken by your audit firm. [Total: 30 marks] END OF QUESTION PAPER Question 4 (a) According to ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements: 'When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.' Required: Discuss why the auditor should presume that there are risks of fraud in revenue recognition and why ISA 240 requires specific auditor responses in relation to the risks identified. [10 marks] (b) You are the manager responsible for the audit of Beecham Ltd, a supermarket owned and managed by a one man shareholder, Mr Peter Brown. The audit for the year ended 30 June 2017 is nearing completion and the draft financial statements recognise total assets of Rs 40 million and profit before tax of Rs 4 million. The audit senior has Page 5 of 6 Advanced Auditing - ACF3003 (5) left the following file notes for your consideration during your review of the audit working papers: Cash transfers During a review of the cash book, a receipt of Rs 500,000 was identified which was accompanied by the description 'BD'. Bank statements showed that the following day a nearly identical amount was transferred into a bank account held in a foreign country. When I asked the financial controller about this, he requested that I speak to Mr Peter, as he has sole responsibility for cash management. According to Mr Peter, an old friend of his, Navin, has loaned the money to the company to fund further expansion and the money has been invested until it is needed. Documentary evidence concerning the transaction has been requested from Mr Peter but has not yet been received. [10 marks] (ii) Legal dispute At the year end Beecham Ltd reversed a provision relating to an ongoing legal dispute with an ex-employee who was claiming Rs 200,000 for unfair dismissal. This amount was provided in full in the financial statements for the year ended 30 June 2016 but has now been reversed because Mr Peter believes it is now likely that Beecham Ltd will successfully defend the legal case. Mr Peter has not been available to discuss this matter and no additional documentary evidence has been made available since the end of the previous year's audit. The audit report was unmodified in the previous year. [10 marks] Required: Evaluate the implications for the completion of the audit, recommending any further actions which should be taken by your audit firm. [Total: 30 marks] END OF QUESTION PAPER