ALL FIVE questions are compulsory and MUST be attempted

　　1（a）Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Management,to communicate deficiencies in internal controls.In particular SIGNIFICANT deficiencies in internal controls must be communicated in writing to those charged with governance. 　　

　　Required：

　　Explain examples of matters the auditor should consider in determining whether a deficiency in internal controls is significant.　　　　　　　　　　　　　　　　　　　　　　 （5 marks）

　　Greystone Co is a retailer of ladies clothing and accessories.It operates in many countries around the world and has expanded steadily from its base in Europe.Its main market is aimed at 15 to 35 year olds and its prices are mid to low range.The company‘s year end was 30 September 2010.

　　In the past the company has bulk ordered its clothing and accessories twice a year.However,if their goods failed to meet the key fashion trends then this resulted in significant inventory write downs.As a result of this the company has recently introduced a just in time ordering system.The fashion buyers make an assessment nine months in advance as to what the key trends are likely to be,these goods are sourced from their suppliers but only limited numbers are initially ordered.

　　Greystone Co has an internal audit department but at present their only role is to perform regular inventory counts at the stores.

　　Ordering process

　　Each country has a purchasing manager who decides on the initial inventory levels for each store,this is not done in conjunction with store or sales managers. These quantities are communicated to the central buying department at the head office in Europe.An ordering clerk amalgamates all country orders by specified regions of countries,such as Central Europe and North America,and passes them to the purchasing director to review and authorise.

　　As the goods are sold,it is the store manager’s responsibility to re-order the goods through the purchasing manager;they are prompted weekly to review inventory levels as although the goods are just in time,it can still take up to four weeks for goods to be received in store.

　　It is not possible to order goods from other branches of stores as all ordering must be undertaken through the purchasing manager.If a customer requests an item of clothing,which is unavailable in a particular store,then the customer is provided with other branch telephone numbers or recommended to try the company website.

　　Goods received and Invoicing

　　To speed up the ordering to receipt of goods cycle,the goods are delivered directly from the suppliers to the individual stores.On receipt of goods the quantities received are checked by a sales assistant against the supplier‘s delivery note,and then the assistant produces a goods received note（GRN）.This is done at quiet times of the day so as to maximise sales. The checked GRNs are sent to head office for matching with purchase invoices.

　　As purchase invoices are received they are manually matched to GRNs from the stores,this can be a very time consuming process as some suppliers may have delivered to over 500 stores.Once the invoice has been agreed then it is sent to the purchasing director for authorisation. It is at this stage that the invoice is entered onto the purchase ledger.

　　Required：

　　（b）As the external auditors of Greystone Co,write a report to management in respect of the purchasing system which:

　　（i）Identifies and explains FOUR deficiencies in that system;

　　（ii）Explains the possible implication of each deficiency;

　　（iii）Provides a recommendation to address each deficiency.A covering letter is required. Note:Up to two marks will be awarded within this requirement for presentation. （14 marks）

　　（c）Describe substantive procedures the auditor should perform on the year-end trade payables of Greystone Co.（5 marks）

　　（d）Describe additional assignments that the internal audit department of Greystone Co could be asked to perform by those charged with governance. （6 marks）

　　（30 marks）

　　2（a）Explain the concept of TRUE and FAIR presentation. （4 marks）

　　（b）Explain the status of International Standards on Auditing. （2 marks）

　　（c）ISA 230 Audit Documentation deals with the auditor‘s responsibility to prepare audit documentation for an audit of financial statements.

　　Required：

　　State FOUR benefits of documenting audit work.（4 marks）

　　（10 marks）

　　3（a）In agreeing the terms of an audit engagement,the auditor is required to agree the basis on which the audit is to be carried out.This involves establishing whether the preconditions for an audit are present and confirming that there is a common understanding between the auditor and management of the terms of the engagement.

　　Required:

　　Describe the process the auditor should undertake to assess whether the PRECONDITIONS for an audit are present. （3 marks）

　　（b）List FOUR examples of matters the auditor may consider when obtaining an understanding of the entity.（2 marks）

　　（c）You are the audit senior of White & Co and are planning the audit of Redsmith Co for the year ended 30 September 2010.The company produces printers and has been a client of your firm for two years;your audit manager has already had a planning meeting with the finance director.He has provided you with the following notes of his meeting and financial statement extracts.

　　Redsmith's management were disappointed with the 2009 results and so in 2010 undertook a number of strategies to improve the trading results.This included the introduction of a generous sales-related bonus scheme for their salesmen and a high profile advertising campaign.In addition,as market conditions are difficult for their customers,they have extended the credit period given to them.

　　The finance director of Redsmith has reviewed the inventory valuation policy and has included additional overheads incurred this year as he considers them to be production related. He is happy with the 2010 results and feels that they are a good reflection of the improved trading levels.