December 2019 exam short form Qs Flashcards
The UK government and regulators have commissioned reviews of the audit profession to
address criticisms of external auditors.
Requirement
Outline the main areas of criticism
(3 marks)
Criticisms of external auditors
* Lack of audit quality/scepticism
* High profile collapses following issue of inappropriate audit opinions
* Lack of independence
* Non-audit services provided to clients
* Lack of separation of audit and advisory practices of firms
* Lack of competition/dominance of the “Big 4”
* Failure to assess business risks over periods greater than 12 months
In accordance with your firm’s policies, the engagement partner responsible for the external
audit of Almond Ltd (Almond) is due to be rotated off the audit team as she has been the audit
partner for ten years. However, the chief executive of Almond has requested that she continues
as the audit partner to maintain the quality of the audit.
Requirement
Identify and explain the threats to your firm’s objectivity and independence and state the
actions that your firm should take.
(4 marks)
Threats
* Familiarity
* Long association
– Close relationship
– Insufficiently sceptical
* Self-interest
* Self-review
– Reluctant to identify prior year misstatements
* Third party test
Actions
* Rotate the partner
* Apply safeguards
– independent EQCR
– add a second partner to the team
– document the reason why the engagement partner continues
– facts communicated to TCWG
* Consult ethics partner
External auditors have a responsibility to communicate matters of governance interest arising
from the audit to those charged with governance.
Requirement
List the matters of governance interest that should be communicated by external auditors to
those charged with governance at an unlisted company.
(4 marks)
- Deficiencies in internal control
- Views on qualitative matters
– whether accounting policies and estimates used are appropriate
– financial statement disclosures - Difficulties encountered during the audit
- Significant matters discussed with management
- Representations requested
- Form and content of auditor’s report
- Misstatements
- Uncorrected misstatements
- Actual or potential fraud
- Non-compliance with key laws and regulations
- Material inconsistency with the financial statements or misstatement of fact in the ‘other
information’ published with the financial statements - Responsibilities of auditors and those charged with governance.
You are the audit senior of Brazil plc (Brazil), a listed company. During the audit you overheard
Joseph, the finance director of Brazil, speaking to a friend. He asked his friend to buy shares in
Brazil on his behalf because another company was about to launch a takeover bid which is
likely to result in a significant increase in Brazil’s share price. Joseph is an ICAEW Chartered
Accountant.
Requirement
Identify and explain the ethical and legal issues arising for Joseph in this scenario.
(4 marks)
- Breach of confidentiality
– improper disclosure/sharing information
– improper use - Breach of professional behaviour
– lack of integrity
– dishonest behaviour
– brings the profession into disrepute - Failure to comply with laws and regulations
– Insider dealing
◦ criminal offence
◦ finance director benefiting financially
◦ benefitting from proceeds of crime.
Your firm of ICAEW Chartered Accountants is the external auditor of Walnut plc (Walnut), a
listed company. Your firm decided to resign during its term of office, due to a disagreement
with the directors of Walnut over the accounting policy in respect of income recognition.
Requirement
List your firm’s rights and responsibilities, including those under the Companies Act 2006, in
relation to its resignation.
(3 marks)
Rights
* Outgoing auditors may request the directors to:
– convene an extraordinary general meeting (EGM)
– circulate a written statement to members
* Auditors can attend and speak at the EGM.
Responsibilities
* Deposit a statement of circumstances at Walnut’s registered office
* As Walnut is a listed company, there is no option to state there are no circumstances
* Cooperate with incoming auditor
* Retain working papers/anti-money laundering documentation for required time
* Maintain client confidentiality.
Your firm is the external auditor of Hazel Ltd (Hazel), a retailer of imported furniture, for the
year ended 31 October 20X9. As part of your analytical procedures on the financial statements
of Hazel, you note that inventory days has fallen from 60 days at 31 October 20X8 to 52 days at
31 October 20X9. The financial controller explains that this is due to a combination of the
factors listed below:
(1) inventory which had been fully written down in the previous year was disposed of during
the year ended 31 October 20X9.
(2) new inventory management software used for monitoring inventory levels was installed in
December 20X8 in the warehouse.
Requirement
For each of the above factors, briefly explain whether that factor is a plausible explanation for
the fall in inventory days.
(2 marks)
Whether explanations for a fall in inventory days are plausible
(1) Disposal of fully written down inventory
* Explanation is not plausible
– no effect as inventory already included with a zero net realisable value
(2) New inventory management software installed
* Plausible explanation
– may result in more efficient inventory management/lower inventory levels