This is a paper from the Singapore QP exams (Dec 2015). I need detailed solutions for question 3 from someone familiar with the Singapore Standards of Auditing

Singapore Qualification Programme (QP) Examination 15 December 2015 Assurance INSTRUCTIONS TO CANDIDATES: 1. The time allowed for this examination paper is 3 hours 15 minutes, including 15 minutes of reading time. Annotations are allowed on the question paper only during the reading time. 2. This examination paper has FOUR (4) questions and comprises NINETEEN (19) pages (including this instruction sheet). Each question may have MULTIPLE parts and ALL questions are examinable. 3. This is an open book examination and you may use a non-programmable financial calculator that complies with SAC's \"acceptable calculator list\". However, computers, mobile phones, tablets, and other electronic devices MUST NOT be used during the examination. 4. The number of marks allocated is shown at the end of each question. 5. Write legibly in black/blue ink only. 6. All answers must be written in the answer booklets provided. 7. Begin your answer to each question in a separate answer booklet. 8. This question paper MUST NOT be removed from the examination room. 9. This examination paper is the property of the Singapore Accountancy Commission. MODULE-SPECIFIC INSTRUCTIONS: 10. Unless specified otherwise, assume that all the reporting entities in all the questions adopt, for all the relevant years, the Singapore Financial Reporting Standards that were issued by the Accounting Standards Council as at 1 January 2015. 11. Assume the functional and presentation currency is the Singapore dollar (S$) unless otherwise stated. Question 1 - (a), (b), (c), (d), (e), (f) and (g) You are an audit senior assigned to the audit of all the entities in the Wayway Group (Group) for the financial year ended 30 April 2015. The principal activities of the group are research, development, manufacturing, distribution, and sales of medical devices. All subsidiaries are wholly owned. You are reviewing the draft consolidated financial statements and other management-prepared schedules as part of the planning for the final audit. A partial extract of the consolidation schedule prepared by the Group Accountant is shown on the following page. 2015 Singapore Accountancy Commission Page 2 of 19 Subsidiaries Consolidation Adjustments Dr Cr $'000 $'000 30,000 (1) 25,000 (1) Account Wayway $'000 S1 $'000 S2 $'000 S3 $'000 Total $'000 Sales 100,000 80,000 70,000 60,000 310,000 Cost of sales (30,000) (20,000) (35,000) (25,000) (110,000) Gross profit Operating expense Operating profit Loss on disposal 70,000 60,000 35,000 35,000 200,000 195,000 (35,000) (30,000) (15,000) (10,000) (90,000) (90,000) 35,000 30,000 20,000 25,000 110,000 105,000 (8,000) (5) - - - (8,000) (8,000) Receivable 20,000 12,000 - 8,000 40,000 Inventories 10,000 8,000 - 6,000 24,000 Investment in subsidiaries 300,000 300,000 Goodwill Payable 30,000 30,000 (2) 5,000 (1) 300,000 (3) 20,000 - 2015 Singapore Accountancy Commission 9,000 59,000 50,000 (4) 30,000 (2) Page 3 of 19 Group $'000 280,000 (85,000) 10,000 19,000 50,000 29,000 Note Description (1) (2) To eliminate intra-group sales and unrealised profit To eliminate intra-group balances (3) (4) To eliminate investment in subsidiaries To recognise goodwill 30 April 2015 Investment in Draft subsidiaries $'000 S1 200,000 S2 S3 100,000 Total (5) (6) 300,000 S1 S2 S3 30 April 2015 Draft $'000 20,000 12,000 18,000 Total 50,000 Goodwill Note 30 April 2014 Actual $'000 200,000 150,000 350,000 Note 30 April 2014 Actual $'000 20,000 12,000 32,000 Note Description (5) S2 was sold to a third party company, Mercio Pte Ltd, on 31 March 2015 for cash consideration of $142,000,000. (6) S3 was a fully owned subsidiary acquired on 30 April 2015. goodwill was computed as follows: $ Cash consideration paid on 30 April 2015 60,000,000 Cash consideration payable on 30 April 2017 40,000,000 Non-controlling interest less: Fair value of net assets on 30 April 2015 (82,000,000) Goodwill 18,000,000 The The Purchase Price Allocation (PPA) relating to the acquisition of S3 on 30 April 2015 was performed by an international public accounting firm, DEKP LLP, which issued its PPA report dated 31 May 2015. 2015 Singapore Accountancy Commission Page 4 of 19 Question 1 required: (a) Describe FOUR audit procedures to be performed on the intra-group sales. (4 marks) (b) Describe THREE audit procedures to be performed on the intra-group receivables and payables. (c) Describe FOUR audit procedures to be performed to verify the unrealised profit eliminated. (d) (3 marks) (4 marks) Describe FIVE audit procedures to be performed to verify the investment in S3. (5 marks) (e) Describe FIVE audit procedures to be performed to verify the goodwill arising from investment in S3. (f) Explain the potential misstatements in the goodwill relating to S2 and the loss on disposal of S2. (g) (5 marks) (2 marks) Identify and explain the potential misstatements in consolidation of S3's results in the consolidation schedule. (2 marks) (Total: 25 marks) 2015 Singapore Accountancy Commission Page 5 of 19 Question 2 - (a), (b), (c), (d), (e), (f) and (g) Wisely LLP (Wisely) is a public accounting firm. Its audit quality control committee (comprising two senior audit partners and four audit managers) will be meeting next Monday to discuss the following issues relating to existing and prospective audit clients: Princeton Ltd Princeton Ltd (Princeton) is a Cayman Island registered company that is listed on the Singapore Exchange (SGX). The principal activities of Princeton are the provision of website development services and printing services (such as annual reports of listed companies). During the year, Princeton expanded its business activities to include investments in palm tree plantations, with a view to sell its produce. The audit for the financial year ended 30 September 2015 is nearing completion. The audit engagement partner has proposed a qualified opinion due to two issues: There are four sales invoices (dated 30 September 2015) for which there are no supporting documents except the sales agreement. The total value of these four sales invoices amounted to $1,760,000, 2% of the total revenue. The cost of service for these four invoices amounted to $640,000. The methods and the assumptions used by Princeton in determining the fair value of its agricultural produce are unreasonable. According to the uncorrected misstatements schedule, the income may have been overstated by $60m. The concurring partner has agreed with the judgment of the engagement partner. However, the Finance Director (FD) and Audit Committee (AC) of Princeton have voiced their objection regarding the proposed qualified opinion. The FD has suggested Wisely to meet up with the customers to verify the validity of the four sales invoices. The FD also suggested Princeton to engage another audit firm, 2015 Singapore Accountancy Commission Page 6 of 19 Mosie LLP (Mosie), to review its valuation to provide additional comfort to Wisely. The Chairman of the AC has thus requested Wisely to suspend the audit. The AC Chairman is concerned that the proposed qualified opinion will continue to affect the audit opinion for subsequent financial years. i.e. the audit opinion on the financial statements for year ending 30 September 2016 will also be qualified. The AC Chairman has alluded that Princeton is prepared to change its auditor to Mosie to ensure an unmodified opinion which is deserved. Question 2 required: (a) Discuss the main ethical issue faced by Wisely arising from Princeton's action to engage Mosie. (b) (1 mark) Discuss FOUR main ethical issues faced by Mosie when considering the proposed engagement and the safeguards that Mosie should take to mitigate the ethical issues. 2015 Singapore Accountancy Commission (12 marks) Page 7 of 19 Assume that the issue on fair value is satisfactorily resolved by Princeton revising the assumptions and changing the methods used. However, the issue on the validity of the four sales invoices remains unresolved, and is considered to be material and pervasive. A modified opinion will be expressed by Wisely on the financial statements for the year ended 30 September 2015. Question 2 required: (c) Draft the modified opinion paragraph. (2 marks) (d) With reference to appropriate Singapore Standards on Auditing, explain how this will affect the auditor's report for the financial year ending 30 September 2016 if the issue remains unresolved in 2016. 2015 Singapore Accountancy Commission (2 marks) Page 8 of 19 Oriental Private Limited Oriental Private Limited (Oriental) is a boutique diamond trader that has been in operation for three years. Oriental has approached Wisely on 5 December 2015 to accept appointment as its statutory auditor for the financial year ended 30 November 2015. Oriental does not wish to re-appoint its existing auditor Mozilla LLP (Mozilla) and would like to nominate a new auditor in the upcoming annual general meeting scheduled on 28 February 2016. Mozilla has issued a disclaimer of opinion for both 2013 and 2014 financial statements. The reason for the modified opinions is the same for both years; Oriental refused to allow Mozilla to examine the purchase contracts and invoices, citing the reason of the need to protect trade secrets. The audit opinion for 2015 will also be similarly modified for the same reason. Oriental confirmed that this is a major factor in the decision to change auditors. Question 2 required: (e) With reference to appropriate Singapore Standards on Auditing, explain why Wisely should not accept the nomination. 2015 Singapore Accountancy Commission (3 marks) Page 9 of 19 Queenly Private Limited Queenly Private Limited (Queenly) is a boutique high-end diamond trader. It holds up to 100 pieces of diamonds (worth $5 million) at its own store in Orchard Road. The diamond inventory is the largest asset class (in monetary value) in the statement of financial position. On average, Queenly buys and sells 20 diamonds per month, with an average price of $80,000 each. Queenly has approached Wisely on 5 December 2015 to accept appointment as its statutory auditor for the next financial year ending 30 November 2016. Its current auditor, SP LLP (SP), has decided not to accept reappointment after completing the 2015 audit, for which an unmodified opinion will be expressed. SP has responded to Wisely's professional clearance letter and stated there are no issues affecting Wisely's acceptance of the audit appointment. However, when Wisely wrote to SP to request for a review of SP's audit working papers, SP refused to allow Wisely to examine its working papers. Question 2 required: (f) With reference to appropriate Singapore Standards on Auditing, explain why Wisely should perform audit procedures to verify the inventory balances as at 1 December 2015. (2 marks) (g) Describe THREE audit procedures to be performed to verify inventory quantity as at 1 December 2015. (3 marks) (Total: 25 marks) 2015 Singapore Accountancy Commission Page 10 of 19 Question 3 - (a), (b), (c), (d), (e), (f), (g), (h) and (i) Good Money Pte Ltd (GM) is a cable trader that sells cables to automobile workshops. To be close to its customers, GM has four warehouses: three are owned by GM (Warehouse North, South and East) and one is a rented warehouse from a third party (Warehouse West). GM closed the three owned warehouses at year-end, 30 November 2015, for a full inventory count. The accounting department is responsible for the stock count. As Warehouse West is a rented warehouse that is also utilised by other entities, there will be no stock count at year-end. Warehouse South, East and West store the same inventory items, i.e. drums of small-sized cables that are sold in boxes to customers while Warehouse North stores drums of large-sized cables, with a height of 1.5m and diameter of 1m, as shown in the picture below: These cables are cut into different lengths based on customer orders. At year-end, there will be some full drums and partially-used drums left in the warehouses. The inventory balance at each of the warehouse is material. The management of Warehouse West provides GM with web-based access to a portal to view its inventory movement. The information provided is very detailed, including stock code, quantity in and out, goods received notes, supplier delivery notes, goods despatch notes, date and time stamp. These details can be printed as hardcopies as well. A Tan LLP is the auditor of GM. On 30 November 2015, three audit assistants and three audit seniors, in three teams, were assigned to attend the inventory counts at Warehouse North, South and East. Each team consists of a senior and an assistant. The following were the observations of the audit teams at each warehouse: 2015 Singapore Accountancy Commission Page 11 of 19 Warehouse East By the time the audit team arrived, the client had completed the inventory count. Quantity counted was recorded using black markers on serialised white count sheets which were pasted on each box. The warehouse manager was the only one in the warehouse waiting for the audit staff to conduct test counts. The audit team selected random samples according to the audit plan of stock items on the floor, counted the number of boxes, and agreed to the details on the count sheets. The sample size was according to the audit plan. The audit team also noted that there were a few boxes that had red count sheets pasted on them instead of white. The warehouse manager informed them that these were items reserved by a regular customer. The items were high quality cables that were in short supply. As the regular customer was willing to pay in full, GM had kept these aside for the customer. Customers paying before delivery to reserve popular items were a new trend as the manufacturers had cut back on production to contain costs. The audit senior immediately instructed the audit assistant to document the details of these inventories and commented that these should not be included in the year-end inventory count. Warehouse South The count started after the audit team arrived. The audit team observed that the count teams were rushing through the count. No boxes were opened. The counting of the boxes was also done in a cursory way. Warehouse North The audit team observed the count teams performing the following: Counting the drums (for those unused drums); and Measuring the diameters of those drums where the cables were partially used. The count manager informed the audit team that the length of the cables in the partially used drums was estimated by the diameters using a formula. 2015 Singapore Accountancy Commission Page 12 of 19 Question 3 required: (a) Comment on the adequacy of the test count performed by the audit staff at Warehouse East. (b) (2 marks) With reference to appropriate Singapore Standards on Auditing, discuss whether the objectives of the auditor attending inventory count have been achieved at Warehouse East. (c) (4 marks) With reference to appropriate Singapore Financial Reporting Standards, discuss the audit senior's comment that the items in Warehouse East reserved by a customer should not be included in the year-end inventory count. (2 marks) (d) Describe TWO audit procedures to be performed to confirm whether the reserved items in Warehouse East should be excluded from year-end inventory count. (e) Describe, with justifications, the actions the audit senior should take upon seeing the way inventories were counted at Warehouse South. (f) (3 marks) Describe the audit procedures to be performed on the length of cables estimated. (g) (2 marks) (4 marks) Describe the audit procedures to be performed to verify the quantities of inventories held at Warehouse West. 2015 Singapore Accountancy Commission (3 marks) Page 13 of 19 After the inventory count was concluded, GM's inventory system suffered data loss due to hard disk failure. Although count sheets were still available, the costing information was unavailable. GM values its inventories based on First-In-First-Out (FIFO). The latest backup was done on 31 October 2015. GM intends to reconstruct the inventory records. Question 3 required: (h) Suggest to GM how the inventory cost as at 30 November 2015 might be reconstructed from the records restored from backup as at 31 October 2015. (3 marks) (i) Describe the audit procedures to be performed to verify the inventories were valued according to FIFO. (2 marks) (Total: 25 marks) 2015 Singapore Accountancy Commission Page 14 of 19 Question 4 - (a), (b), (c), (d) and (e) Ben Tan, the managing director and the only shareholder of a private education school, Harford College Private Limited (HC), has approached DEKP LLP (DEKP), an audit firm, to provide internal audit services. HC is not an existing client of DEKP. HC's headquarters (HQ) is located in Orchard Road. HC has four branches in Singapore, namely, Bedok, Clementi, Raffles Place and Ang Mo Kio. Tutors are recruited by the Human Resource department from the HQ and assigned to the various branches. Each branch is run by a branch manager and all branch staff, including tutors, report to the branch manager. The accounting function, including payroll, is performed by a small accounting team from the HQ. The accounting department relies on reports from branch managers on tutor termination to effect the calculation of salaries up to the last day of service. Otherwise, the payroll software will process the fixed salary payment for bank transfers. Although Ben is the managing director, he does not attend to HC's business actively as he has other businesses to look after. The daily operations of HC are managed by Kate Ting, the general manager of HC. An audit manager from DEKP met Ben to understand more of his requirements. The following meeting notes document the important information discussed in the meeting: 2015 Singapore Accountancy Commission Page 15 of 19 Currently, there is no internal audit function in HC. Ben is concerned with cash flow problems. Whilst student enrolment has been increasing, the cash flow seems to be deteriorating. There have not been major adjustments to tutors' salaries and the operating lease payments for all branches remain stable. The payment for tutor salaries has been increasing quite significantly. The only other significant capital expenditure was the acquisition of personal computers in June 2015 for the Bedok branch's student lounge. From the enrolment reports that he received, Ben noted the Bedok branch has seen the largest increase in enrolment. The branch has also seen the greatest increase in the number of tutors. However, the net cash flow from this branch is the lowest amongst all branches. Given the capacity of the Bedok branch, Ben does not believe that it could accommodate the stated number of tutors. As HC collects course fees per six-monthly-semester in advance, cash flow is expected to be healthy, at least in June and December of each year. As HC accepts cash or cheques, there is no receivable. The cash reports he received, in particular from the Bedok branch, do not conform to his expectations. Ben does not think the problem is related to unrecorded enrolment because the attendance records seem to tally with enrolment reports. Ben would like the internal auditor to review the operations in the Bedok branch for the period from 1 June 2015 to 30 June 2015 in the following areas: Are there any fictitious tutors in the Bedok branch? Are there any tutors who left HC and continue to receive salaries? Are there any uncollected course fees? Are the prices paid for the personal computers reasonable? Ben would like to know the structure of the report that DEKP is likely to submit after the review. 2015 Singapore Accountancy Commission Page 16 of 19 Question 4 required: (a) Describe the examination procedures to be performed to: i. Confirm whether there are any fictitious tutors. (3 marks) ii. Identify any ex-tutors that continue to receive salary payment. (3 marks) iii. Quantify the amounts paid to ex-tutors. (3 marks) iv. Identify uncollected course fees. (3 marks) v. Confirm prices paid for the personal computers are reasonable. (3 marks) (b) With reference to appropriate Singapore Standard on Related Services, outline the THREE most important aspects of the engagement to be presented in the report to be submitted to Ben. (3 marks) 2015 Singapore Accountancy Commission Page 17 of 19 The review confirmed that prices paid for the personal computers were reasonable. However, a large commission fee had been paid to an agent, KT & Co, to procure students and tutors for Bedok Branch. Further procedures performed identified KT & Co as a company registered by Kate Ting, the general manager of HC. Ben was furious about the commission fee and commented that he would initiate an internal disciplinary investigation against Kate. Ben is interested to know how to prevent similar incidents from happening again. Question 4 required: (c) Recommend TWO appropriate internal controls that HC should implement to prevent the unauthorised use of agents in future. 2015 Singapore Accountancy Commission (2 marks) Page 18 of 19 The review also identified ten tutors who had left HC but were kept in the payroll. Their resignation notices submitted to the branch manager were not forwarded to the payroll function for processing. The monies continued to be credited into bank accounts of these ex-tutors. Question 4 required: (d) Recommend TWO appropriate internal controls that HC should implement to ensure resignation is promptly updated in the payroll. (2 marks) Ben has requested his close friend, an audit partner in DEKP, to be the engagement partner in this case. Question 4 required: (e) Discuss the ethical issues and whether his request is possible or is strictly prohibited. (3 marks) (Total: 25 marks) END OF PAPER 2015 Singapore Accountancy Commission Page 19 of 19