ACCA AA Step 04 (0519) QUESTIONS & ANSWERS(ELABORATIONS)

ACCA AA Step 04 (0519) QUESTIONS & ANSWERS(ELABORATIONS) Section B Question 1 of 9 SeaPass is a ferry company which operates daily ferry crossings from the United Kingdom (UK) to France. The company’s year e ...

ACCA AA Step 04 (0519) QUESTIONS & ANSWERS(ELABORATIONS) Section B Question 1 of 9 SeaPass is a ferry company which operates daily ferry crossings from the United Kingdom (UK) to France. The company’s year end is 30 June 20X9. You are the audit senior and you have started planning the audit. Your audit manager has asked you to have a planning meeting with the client and to identify any relevant audit risks so that the audit plan can be completed. You obtained the following indivation at the meeting: SeaPass has had a challenging year. The current economic crisis and worries about the future of the Euro currency, has meant that many passengers who might previously have booked ferry crossings to France are now choosing to spend their holiday within the UK. SeaPass is under continual pressure from its shareholders to show consistent perdivance. In an attempt to win new passengers and generate additional income, SeaPass spent $800,000 on an advertising campaign which featured both in the national press and on national television. The campaign took place in May 20X9 and the company is convinced that this will vastly improve customer numbers during summer 20X9. Consequently the finance director is proposing to match most of the advertising cost against summer revenues and has shown $600,000 of the $800,000 spent as a prepayment at the year end. When customers book their ferry crossing they are required to pay an upfront deposit of 20% of the total cost. In previous years this has been recognised as revenue in the month that the ferry crossing is made. However this year SeaPass have recognised the revenue when the deposit is received. The finance director has explained that this is because the company has spent the money as it was received in order to finance the advertising campaign. The balance of 80% is taken by the company on the day of departure. SeaPass want their customers to have an excellent experience when they travel with them. With this in mind they offer a “money back guarantee”. If customers are excessively delayed or they are not happy with the service provided by SeaPass, then they can claim compensation under the company’s money back guarantee. Despite the company’s very best efforts to improve customer satisfaction, compensation payments are made on a regular basis. SeaPass has also found that the price of fuel has risen sharply during the course of the year and they have not been able to pass this price rise on to their customers in the div of higher ticket prices. This has meant that its operating costs have increased considerably, leading to falling profit margins. The company does hold some cash reserves in the div of bank deposits. However, these cannot be accessed for 6 months and so the company has had to take out a short term overdraft. The finance director is pleased that the financial statements will show a net positive cash position as the bank deposits will be greater than the overdraft at the year end. Required (a) List and explain the elements of an assurance engagement. (5 marks) 0 out of 0 This question has not yet been scored. Marking scheme Marks (a) Up to 1 mark per explanation of element: Suitable criteria 1 Assurance report 1 Appropriate evidence 1 Subject matter 1 Three party relationship (intended user, responsible party, practitioner) 1 5 (b) 1 mark per audit risk, 1 mark for explaining the auditor’s response to the risk Pressure to maintain results 2 Accounting treatment of advertising expenditure 2 Accounting treatment of deposits 2 Provisions for customer compensation payments 2 Disclosure of bank and bank overdraft 2