Question 1

SECTION B: CONSTRUCTED RESPONSE

SCENARIO: GLOBALMED LOGISTICS

You are an audit supervisor at Nexus & Co, planning the audit of GlobalMed Logistics for the year ending 31 December 20X5. GlobalMed is a cross-border multinational company specializing in the temperature-controlled transport of pharmaceutical products.

During your planning meeting with the Finance Director, you noted the following:
1. GlobalMed has expanded rapidly this year, acquiring a new fleet of specialized refrigerated trucks. This expansion was financed by a new $50m bank loan. The loan agreement includes a strict covenant requiring GlobalMed to maintain a current ratio of at least 1.5.
2. The company has constructed three new automated, temperature-controlled warehouses. The software controlling the temperature and inventory tracking was developed in-house and implemented halfway through the year. 
3. GlobalMed recognizes revenue upon the dispatch of pharmaceuticals from their warehouses. However, due to complex cross-border customs procedures, delivery to the final customer can take up to three weeks. The contracts state that the risk of loss remains with GlobalMed until the customer signs for the delivery.
4. The company employs an internal audit department. The Finance Director has suggested that Nexus & Co could rely on the internal audit team's work regarding the year-end inventory counts across the various warehouses to save time.
5. GlobalMed is currently facing a regulatory investigation in one of its operating countries regarding alleged breaches of pharmaceutical handling regulations. If found guilty, the company could face significant fines and the loss of its operating license in that country.

REQUIREMENTS:
(a) Describe FIVE audit risks, and explain the auditor's response to each risk, in planning the audit of GlobalMed Logistics. (20 marks)
(b) Explain the factors Nexus & Co should consider before deciding whether to rely on the work of GlobalMed's internal audit department regarding the inventory counts. (5 marks)
(c) Describe the purpose of performing analytical procedures at the planning stage of the audit, and give one example relevant to GlobalMed. (5 marks)

Accepted Answer

For part (a), use a tabular format in your mind: Risk (What is the issue? What is the accounting impact?) and Response (What specific action will the auditor take?). Ensure responses are actionable audit procedures, not management advice. For part (b), recall the criteria from ISA 610 (Objectivity, Competence, Systematic approach). For part (c), recall ISA 315 requirements for risk assessment.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

In part (a), students often provide business risks (e.g., 'the medicine might spoil and the company will lose money') instead of audit risks ('the medicine might spoil, leading to inventory being overvalued in the financial statements'). Responses must be audit procedures, not advice to management.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA AA — Audit and Assurance Practice Exam 4

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