Welcome to your Test Mock exam

Question 1

Following ongoing challenges arising from COVID 19 and possible lockdown, an immediate board meeting was summoned to address matters arising from the previous meeting and immediate measures to be taken given the current crisis.

Matters arising from previous board meetings
  • It was decided to raise funds through an IPO and CFO, Supun Perera, CFO was requested to study the key requirements in relation to board composition and committees.
  • Sisira also commented that traditional financial reporting does not reflect the true value of the business and the organization can portray the holistic picture of value creation from intangible capital using integrated reporting. Supun was requested to develop a concept paper to explain the benefits of integrated reporting and how the business model of HCL can be articulated using multi capital approach.
  • Based on the comments made by FD Sisira Gunewardena, it was decided to take immediate measures to strengthen the independence of internal auditors and this requires an audit committee oversight on internal audit.
  • Role of the board, management and internal auditors in risk management should require further improvements so that enterprise risk management can be embedded to DNA of the business.

Audit of Financial Year ended 31 March 2020

Richard & Company has been the auditor of HCL for the last 10 years and Mr Palitha Gunawardene is the engagement partner and Mr Kasun Jayawardene is the manager appointed for the audit of financial year ended 31 March 2020.

During the initial audit planning meeting with the management, Palitha explained that the audit team has been advised to follow a risk-based audit approach where they will draw particular attention to the current risks landscape derive risk of material misstatements. This approach also takes into account the effectiveness of control environment and other
components of internal controls using COSO framework.

Palitha brought to the attention of Supun key risks identified by the audit team and preliminary audit findings during the meeting held in 15th August and summary of such issues are given below.

1. Revenue recognition in hotel sector has been identified as a high risk due to the current economic conditions as well as company’s business model
2. Intangible assets include cost incurred in developing a vaccine to combat COVID 19 and this has been identified as a risk of material misstatements
3. Based on the latter issued by SLAASMB, several concerns have been identified in relation to fair value estimates. This includes significant measurement uncertainty, including accounting estimates, and related disclosures relating to fair value of properties, equity instrument and impairment.

4. Palitha explained following issues in relation to value in use calculation prepared by the accountant in relation to the impairment review:
  • A value in use (VIU) calculation was performed on all 5-division based on the pre-tax rate of 12% p.a as the discounting rate;
  • Cash flows for the 3rd year included expected cash flows from new product line of medical devices that is to be launched in 3 years’ time;
  • A growth rate of 10% p.a. has been used to arrive at the terminal value of cash flows;

5. How investments in 35% stake in Healthcare Drugus is to be reflected in the financial statements of HCL to be debated.

Part A- Risk of Material Misstatements

Assume you are the CFO of HCL and Answer following questions

1. Explain the business risk approach to identify risk of material misstatements in
financial statements. (2 Marks)
2. Outline 3 business risks and related risk of material misstatements arising from business risks (9 Marks)
3. Draft a memo to Finance Directors explaining the rationale for high risks identified by auditor and the basis for preliminary audit findings (15 marks)Draft in a word document and upload here
Section 02

01. As the external Auditor of Pahan PLC, you have performed analytical procedures which have highlighted a 40% increase in revenue compared to the previous period (which was your expectation). You intend to perform further audit procedures in addition to inquiries made from management on this. Which further audit procedures would you perform in response to this?

1. For a sample of sales invoices around the period end, inspect the dates and compare with the dates of goods dispatch and the dates recorded in the sales and receivable ledger to confirm the application of correct cutoff.
2. Trace a sample of shipping documents sales invoices and into the sales and receivable ledger.
3. For a sample of sales transactions recorded in the ledger, vouch the sales invoice back to customer orders and shipping documentation.
4. For a sample of sales invoices, examine for proper classification into revenue accounts.