香港注册会计师考试审计试卷cmay2005q.pdf

Module C (May 2005 Session) 1 SECTION A - CASE QUESTIONS (Total: 50 marks) Answer ALL of the following questions. Marks will be awarded for logical argumentation and appropriate presentation of the answers. CASE You are the audit manager of a Hong Kong CPA firm and are currently planning the audit of ABC Industrial Limited (“ABC”) for the year ended 31 December 2004. ABC is a company incorporated in Hong Kong and is engaged in the manufacture of a wide range of Chinese herbal health products. Sales of ABC products, which consist of sixty-nine product lines, are mainly made to major chain stores and drug retailers in Hong Kong. You and the engagement partner have been serving ABC since its listing on the Hong Kong Stock Exchange in 1999. After discussion with ABC’s management and a review of last year’s audit file, the following information has come to your attention: (1) Goods are manufactured centrally at ABC’s factory in GuanXi, China, and are then stored in the Company’s warehouses either in GuanXi or in Hong Kong. (2) The inventory is stored in three warehouses in Hong Kong, and two warehouses in GuanXi. All warehouses are owned by the Company. In order to minimise operating costs, the Company occasionally leases out its unused warehouse spaces to its customers to temporarily store the products which it has already sold to them. (3) ABC uses a perpetual inventory system to keep its inventory. All warehouses are closed at the balance sheet date to allow a full physical inventory taking. However, production in the GuanXi factory will not stop during the physical inventory taking. (4) ABC uses standard costing to value its inventory. At the year-end, the inventory value will be adjusted as and when necessary to absorb cost variances in order to approximate actual production cost in accordance with relevant accounting standards. From previous experience, adjustments rarely deviate more than 3% from the standard cost. (5) Year-end inventory accounts for approximately 23% of ABC’s total assets, and is expected to be disclosed in ABC’s financial statements as follows: HK$’000 Raw materials 8,800 Work in progress 13,290 Finished goods 20,730 42,820 Module C (May 2005 Session) 2 (6) Raw materials largely comprise bulk inventories of various Chinese herbs, which are stored separately in storage containers of different sizes either at the factory or the two warehouses nearby. ABC keeps more than 500 different herbs. Many of these raw materials are used in more than one product and some are expensive Chinese herbs. Most have long use-by-dates provided that they are properly stored. The identification of Chinese herbs requires expert knowledge since many different herbs with significantly different costs and effects have a similar appearance. The costs of different classes of the herb could vary materially even for the same Chinese herb. (7) Work in progress largely comprises mixed or semi-processed herbs, which are stored in several locations throughout the factory, either in large sealed vats awaiting processing or in sealed mixing containers attached to various machines in the factory. Therefore, it is not possible for the staff of ABC to directly observe the conditions of the work in progress. Production is fully automated within a sealed environment once raw materials are input. As required by the licensing terms, ABC employs several qualified Chinese herbs experts to ensure compliance with quality standards. (8) A typical product of ABC has a two-year use-by-date from the date of production. (9) Inventory levels of one product line, Series X, have increased steadily throughout the year under review. ABC’s management assured you that since this is a new line, it would take time for the market to get used to it. (10) The recent launch of a new product, Z, resulted in poorer than expected sales. Consequently, ABC has excess inventory in finished goods, amounting to HK$3,800,000. The use-by-date of this product is eleven months after the balance sheet date. Module C (May 2005 Session) 3 Required: Question 1 (42 marks – approximately 76 minutes) (a) Assess the inherent risks of material misstatement of ABC’s inventory at the assertion level. You should identify and discuss the specific factors that, in your opinion, cause a higher or lower risk of misstatement in (1) raw materials, (2) work in progress and (3) finished goods for the following assertions: (i) existence; (ii) completeness; and (iii) valuation and allocation. (22 marks) (b) Your team have reviewed the internal controls on ABC’s inventory and preformed all the tests of control you considered necessary. Determine the substantive procedures your team would perform on the following assertions, assuming that your team are satisfied with, and will rely on, the internal controls of ABC on its inventory: (i) valuation and allocation of raw materials; (ii) existence of work in progress; (iii) completeness of finished goods; and (iv) valuation of finished g。