Question 1

SECTION B - QUESTION 1 (30 MARKS)

VoltForge Manufacturing Co produces advanced lithium-ion batteries for electric vehicles (EVs). You are the audit manager for the year ended 31 October 20X6.

During the planning meeting, the Finance Director provided the following information:

1. Rapid Expansion: VoltForge has seen a 40% increase in revenue this year. To meet demand, they constructed a new Gigafactory. Construction was completed on 1 August 20X6, but the factory only began full production on 1 October 20X6. All costs incurred up to 1 October 20X6, including staff training and initial material wastage during testing, have been capitalized as part of Property, Plant, and Equipment (PPE).

2. Inventory Valuation: The batteries require raw materials like lithium and cobalt, which are subject to high price volatility. At year-end, VoltForge holds significant quantities of these materials. Due to a recent technological breakthrough by a competitor, the market value of VoltForge's older generation batteries (which make up 20% of finished goods) has dropped significantly.

3. Warranty Provision: VoltForge offers a 5-year warranty on all EV batteries. Historically, the provision was calculated at 2% of revenue. However, due to a known defect in a batch of batteries produced in March 20X6, management has increased the provision to 3% of revenue for this year. The exact cost of recalling and fixing the March batch is currently unknown.

4. Foreign Exchange: VoltForge imports 60% of its raw materials from overseas, invoiced in foreign currencies. The company does not use hedging instruments. The domestic currency has weakened significantly against foreign currencies in the last two months of the year.

5. Bank Loan: To fund the Gigafactory, VoltForge took out a substantial bank loan. The loan agreement includes a strict covenant requiring VoltForge to maintain a current ratio of at least 1.5. If breached, the loan becomes immediately repayable.

Requirements:
(a) Identify and explain FIVE audit risks from the scenario above, and for each risk, formulate an appropriate auditor's response. (20 marks)
(b) Describe the substantive procedures the auditor should perform to obtain sufficient appropriate evidence regarding the Warranty Provision. (5 marks)
(c) Describe the substantive procedures the auditor should perform to obtain sufficient appropriate evidence regarding the additions to Property, Plant, and Equipment (the new Gigafactory). (5 marks)

Accepted Answer

For part (a), use a tabular format: 'Audit Risk' (identify the issue from the text, explain the accounting rule, state the impact on the FS e.g., over/understated) and 'Auditor's Response' (a specific action the audit team will take during the audit to test this risk). For parts (b) and (c), list specific, actionable audit procedures using the AEIOU mnemonic (Analytical procedures, Enquiry, Inspection, Observation, Recalculation).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

In part (a), students often write business risks (e.g., 'The company might lose money on the old batteries') instead of audit risks ('Inventory may be overstated if not written down to NRV'). Responses are often too vague (e.g., 'Check the provision' instead of 'Review post year-end claims to verify the provision amount').

How to approach this question

Full Answer

Common mistakes

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