From reading the prior year audit file you have just realised that Mason funded the original purchase of each aircraft with a secured loan carrying substantial interest charges. The loan is in the process of being renegotiated and the bank have indicated that finance costs will increase further.Furthermore, the directors have told you that Mason's contract with the police force expires in March 20X4, at a time when the police are trying to substantially reduce the amount they pay in the wake of government cuts. It is thought that the contract will be put out to tender, and it is possible that another aircraft provider may also bid for the contract.From the above information, which is the MOST important audit risk that should be documented in the detailed audit plan?
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1 .Which of the following features are corporate governance weaknesses which Tangerine Co would need to address prior to their listing?(1) The chairman has sole responsibility for liaising with shareholders(2) The company has not established an internal audit function(3) The chairman and one of the NEDs are former executive directors of Tangerine Co
A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
2 .Mason has secured a five year contract with each of its four customers (the police force, ambulance service, fire service and the coastguard). The contracts in place are all of equal value. Under the terms of the contract Mason charges customers an annual fee to cover the maintenance, storage and testing of the aircraft and equipment. The annual fee is payable in advance each year with the first annual payment being paid on the date the contract commences.Based on the above information, which of the following statements summarises a key audit risk?
A Mason's assets could be undervalued if the market value of the helicopter fleet exceeds its cost B Mason could breach the terms of its contracts with its customers and be liable to pay penalties, so provisions may be understated C Revenue may be overstated if it is recognised according to the cont...
3 .The audit engagement partner's review has identified the following additional corporate governance weaknesses:(1) All the directors have been members of the board for at least four years(2) The board is comprised of six executive and four non-executive directorsWhich of the following would the engagement partner recommend to address these weaknesses to ensure compliance with corporate governance principles?
A Weakness 1 The directors should be subject to re-election at regular intervals not exceeding three years; Weakness 2 At least 50% of the board must be comprised of non-executive directors B Weakness 1 The directors must be re-appointed annually by the chairman; Weakness 2 At least 75% of the board...
4 .Mason has not purchased any new helicopters during the year to 31 December 20X3; however there has been a lot of re-fitting, replacement and adding of specialist equipment to some of the existing aircraft. This has been necessary to keep up with the latest developments in search and rescue, and to maintain the aircraft to the high standard required under the contracts in place. This information has led you to be concerned that property, plant and equipment may be overstated in the financial statements.Which of the following statements represents a valid response to this audit risk?
A Perform a proof in total calculation of the depreciation charge for the year and investigate any significant differences B Review minutes of training meetings to determine whether the pilots have been trained how to use the specialist equipment C Obtain a breakdown of the capitalised costs and agr...
5 .The engagement partner has assessed the make-up of the audit committee.Which of the following would be valid conclusions from this assessment?(1) It is acceptable for the chairman to chair the audit committee(2) A new member of the audit committee with relevant financial experience must be recruited
A 1 only B 2 only C 1 and 2 D Neither 1 nor 2
7 .The directors are aware that in accordance with corporate governance provisions they have responsibilities for internal control but are unclear as to the extent of these responsibilities.Which of the following correctly describes their responsibilities?
A To review internal controls annually No; To report on internal controls to shareholders No B To review internal controls annually Yes; To report on internal controls to shareholders No C To review internal controls annually No; To report on internal controls to shareholders Yes D To review interna...
8 .Which of the following are valid responses to the fact that Mason's contract with the police force is due for renewal?(1) Review Mason's contracts with its other three customers to determine whether they contain a break clause, in order to determine the likelihood of losing any further contracts to other aircraft providers(2) Contact the police force directly and request confirmation as to whether the contract is to be renewed(3) Review the short-term and long-term funding facilities which are available to Mason(4) Review correspondence with the police force to determine the likelihood of the contract being renewed
A 1, 2 and 3 B 1, 2 and 4 C 1, 3 and 4 D 2, 3 and 4
9 .The board of Tangerine is considering establishing an internal audit function.Which of the following factors would be relevant in making this decision?(1) It would help the audit committee to discharge its responsibilities for monitoring internal control(2) The board would no longer need to take responsibility for the prevention and detection of fraud and error(3) The costs of establishing an internal audit function should be considered against the benefits gained
A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
10 .Mason also holds around USD2 million of aircraft spares which are included within inventory. 55 Mason also holds around USD2 million of aircraft spares which are included within inventory. Mason sells the aircraft spares to amateur flying associations. Aircraft spares which are not sold after three years are scrapped.Approximately a quarter of this value is made up of specialist equipment taken out of aircraft when it was replaced by newer or more advanced equipment. Such specialist equipment is transferred from non-current assets to inventory without adjustment, and continue to be recognised at amortised cost.Which of the following summarises the key audit concern arising from the matter described?
A Accuracy, valuation and allocation of non-current assets B Completeness of non-current assets C Existence of inventory D Accuracy, valuation and allocation of inventory
