D2: Fraud and ISA 210 and Professional Liability

Question 1

Indicators of financial reporting fraud

Answer 1

• Pressure on mgmt. to achieve targets
  -Mgmt. has practice of setting and achieving unrealistic targets
  -History of being involved in non-compliance and fraudulent activities.
  -Dominance by a single individual or small group of people within the entity.
  -heavy use of accounting estimates
  -weak internal controls and control environment
  -Significant R.P transactions
  -Unstable organizational structure: frequent changes in key mgmt. personnel

Question 2

Indicators of misapproprition of assets

Answer 2

-changes in lifestyle and behavior of staff
-huge amts. of cash being processed by hand.
-weak controls over assets

Question 3

steps to do if fraud is discovered :

Answer 3

• discuss facts of the matter with appropriate level of mgmt. and document facts of the matters and responses of mgmt and TCWG in the audit file.
• Consider and assess impact of identified fraud or misstatement on the whole F.S and areas of audit
  -increase professional scepticism

Question 3

steps to do if fraud is discovered :

Answer 3

• discuss facts of the matter with appropriate level of mgmt. and document facts of the matters and responses of mgmt and TCWG in the audit file.
• Consider and assess impact of identified fraud or misstatement on the whole F.S and areas of audit
  -increase professional skepticism and collect more evidence
• increase sample size and year end testing and assign more experienced TM to risky areas

Question 4

Order of reporting fraud:

Answer 4

1st: appropriate level of mgmt.
2nd : TCWG/ AUDIT COMMITTEE
3rd: regulators or legal authorities

Question 5

Order of reporting fraud: Appropriate level of mgmt.

Answer 5

• if fraud is identified or suspected then auditors should report it on timely basis to appropriate level of mgmt.

Question 6

Order of reporting fraud: TCWG/ Audit committee

Answer 6

-if fraud is identified or suspected and it suspected that mgmt or employees that could have material impact on the F.S.
-Then report to TCWG /audit committee and discuss nature and extent of procedures to perform in relation to identified fraud and changes in audit approach and extra work to complete audit.

Question 7

Order of reporting fraud: regulators and legal authorities

Answer 7

• if fraud is identified or suspected and is suspected to involve mgmt. and TCWG then report to legal authorities
• also report if there is legal duty present.
• There might be prob of auditor maintaining confidentiality of client’s info that could prevent reporting. However, auditor’s obligatory responsibility will override this.

Question 8

Auditor’s professional liability to client

Answer 8

-due to contractual relationship between auditor and client through LOE, auditors are req. to adhere to all T&Cs in the LOE, ISAs, code of ethics,ISQCs to have defense against any kind of negligence.

Question 9

Auditor’s professional liability to 3rd parties

Answer 9

• Any party other than client who wishes to claim for negligence against auditors should prove the following 3 criteria points.

Question 10

What are the 3 criteria points to be proved for 3rd party to claim negligence

Answer 10

• A duty of care should have existed between the auditor and the client. The auditor should have known that the 3rd party would rely upon the audited F.S and report to make decision.
• Breach of duty of care
• a financial loss was suffered as a result.

Question 11

How to limit auditor’s liability ?

Answer 11

• Take insurance against losses
• Restrict auditor’s report to intended purpose
• include clauses in LOE to limit liability to any 3rd parties
• perform high quality audit by deeply following ISQCs, ISAs, Code of ethics and L&Rs to reduce risk of negligent audit.
  -Set liability caps with client on a fixed amt. or a multiple of the audit fee.
  -Screen potential clients to assess whether can undertake and manage the risks associated with client.

Question 12

Limiting auditor’s liability : restricting auditor’s report to its intended purpose

Answer 12

• restricting auditor’s report to the intended purpose by specifically mentioning the party or group of people to whom the audit report is addressed to and is for use by the contract.

Question 13

Limiting auditor’s liability : Having insurance against losses

Answer 13

2 kinds of insurance:
a. Professional indemnity insurance - Protecting firm against civil claims made by client or 3rd parties for negligence arising from the work undertaken by the firm.

b. Fidelity guarantee insurance : protects firm from liability through actions of fraud and dishonesty conducted by any partner or employee.

Question 14

Audit approach

Answer 14

-The audit team’s approach to the audit which is a scale of test of controls and substantive procedures to be carried out

Question 15

Description of practicing members

Answer 15

• ACCA or FCCA fellows can only add “ACCA” or
  “FCCA” after completing certain criteria for ACCA and FCCA status. Until completion they are known as ACCA affliates

Question 16

Description of practicing firm

Answer 16

• A firm can only describe itself as a firm or chartered accountant :
• If at least half of the partners are ACCA members

and

• Those partners own at least 5% of voting rights under the partnership agreement

Question 17

Tendering

Answer 17

• A firm puts a tender proposal in response to an open invitation to tender or due to being approached by the client.

Question 18

Matters to consider before accepting to tender :

Answer 18

1. Resources
2. professional competence
3. Mgmt. integrity
4. ethical consideration
5. practical issues

Question 19

Matters to consider before accepting to tender: resources

Answer 19

• Assess whether firm has sufficient and adequate time and staff available to be allocated to the new engagement and whether accepting the new engagement will not disrupt existing client’s work and relations.

Question 20

Matters to consider before accepting to tender: professional competence

Answer 20

to assess whether firm has req. skills , competencies and capabilities to provide quality work to client as per ISA.

Question 21

Matters to consider before accepting to tender: mgmt. integrity

Answer 21

Assess history of mgmt being involved in fraud and NOCLAR to assess whether firm can manage the risk or not

Question 21

Matters to consider before accepting to tender: mgmt. integrity

Answer 21

Assess history of mgmt being involved in fraud and NOCLAR to assess whether firm can manage the risk or not

Question 22

Matters to consider before accepting to tender: ethical considerations

Answer 22

• Assess whether any ethical threats are arising from the engagement and threat to auditor’s independence and objectivity.

Question 23

Matters to consider before accepting to tender: Practical issues

Answer 23

Assess whether performing is expensive for the firm, logistic of performing the engagement and whether firm has overseas branches to mitigate cultural differences

Question 24

Contents of a tender document

Answer 24

1. Audit firm’s background and proposed audit team members.
2. Ability to provide other services
3. specialist skills, specialized dept. or specific qualification available.
4. basis of computing the fee and the fee
5. clarification on client’s misunderstanding or assumptions about availability of information or deadline to complete the audit.
6. Assess whether firm can fulfill client’s needs
7. Audit approach and methodologies

Question 25

Contents of a tender document: fee and basis of computing fee

Answer 25

• include the basis on which the audit fee will be computed and the approx. figure to be charged by the firm to the client.

Question 26

Lowballing

Answer 26

A practice of setting the initial audit fee lower to attract and win clients

Question 26

Lowballing and code of ethics

Answer 26

Code of ethics allows lowballing as long as client is not misled about the level of work represented by the fee and quality of audit is not compromised.

Question 27

Lowballing and its ethical implications

Answer 27

• As audit fee is low initially, so audit firm has incentive to retain client for a no. of years to recover initial losses and impairs their independence and gives rise to self-interest threat of firm wishing to not lose client in the short term.
• Appears unprofessional as it does not allow small firms to compete with each other.
• Professional competence and due care may not be applied if fee is so low that level of quality mgmt. cannot be displayed in engagement