December 2020 exam short form Qs

Question 1

Your firm is the external auditor of Earnshaw Ltd (Earnshaw). The directors of Earnshaw have
requested that you, the audit senior, assist them with the preparation of the statutory financial
statements.
Requirement
Identify and explain the principal threats to independence and objectivity which may arise
from providing this non-audit service and state how your firm can mitigate these threats.
(4 marks)

Answer 1

Threats
Management threat
* decisions/judgements
* eg, estimates/accounting policies
* views closely aligned with management
Self-review
* auditing FS that firm prepared
* unwilling to highlight errors
* over-reliance/insufficiently sceptical/too trusting
Mitigate threats
Ethics partner informed.
Individual not part of audit team.
Informed management.
Capable of making decisions.
Work to be of routine/technical/mechanical nature/no decisions.
Independent review of:
* accounting work
* audit work

Question 2

Your firm is the external auditor of Huntley Ltd (Huntley). The draft directors’ report includes
the following statement: ‘Despite a challenging year, profits remained stable.’ However, the
audited financial statements show that profit from operations fell by 10% and profit before tax
fell by 12%.
Requirements
State, with reasons, the actions your firm should take and outline the implications, if any, for the
auditor’s report.
(4 marks)

Answer 2

Inconsistency between DR and FS.
Appears to be material (profit down 10/12%).
FS are audited, unlikely to be misstated.
CA 2006 responsibility to report.
Ask directors to amend DR.
If DR report amended:
* no modification to report
* state FS and DR are consistent
If DR not amended:
* modify audit report.
* refer to inconsistency in sections headed:
* ‘opinion on other matters prescribed by CA 2006’
* ‘matters on which we are required to report by exception’.

Question 3

Explain why the level of assurance provided by an assurance report on a cash flow forecast
differs from the level of assurance provided by the auditor’s report on the annual financial
statements.
(4 marks)

Answer 3

Examination of CFF provides limited/moderate assurance.
Audit provides reasonable/high level of assurance.
Examination of CFF reduces risk to level that is acceptable in the circumstances.
Audit of FS reduces risk to an acceptably low level.
CFF based on assumptions/estimates:
* subject to uncertainty
Audit is based on historical information:
* verified to a greater degree.
Estimates often corroborated by subsequent events.

Question 4

Your firm has decided not to seek reappointment as Datchet plc’s (Datchet) external auditor for
the year ending 31 August 20X1. This followed a disagreement in relation to the audit of
Datchet’s financial statements for the year ended 31 August 20X0.
Requirement
Set out your firm’s responsibilities and rights, under the Companies Act 2006, in connection
with its decision not to seek reappointment.
(3 marks)

Answer 4

Responsibilities
Statement of circumstances:
* setting out details of disagreement/reasons
* deposited at company’s registered office/Companies House
Datchet is a PIE so no option to deposit statement that there are no circumstances.
Rights
Attend/speak at the company’s annual general meeting.
Make written representations.

Question 5

Your firm is the external auditor of Dipton plc (Dipton) for the year ending 31 December 20X0.
Dipton’s inventory includes liquid chemicals stored in tanks. Dipton intends to use the services
of Chevington Ltd (Chevington), a firm specialising in the measurement of quantities and
compositions of liquids, to assist in measuring Dipton’s inventory at 31 December 20X0. Your
firm intends to use the work of Chevington as part of its audit procedures.
Requirement
Set out the matters to be considered by your firm when using the work of Chevington.
(3 marks)

Answer 5

Level of risk re inventory/materiality of inventory.
Terms of engagement/scope of work.
Accessibility to expert’s working papers/report.
Competence/expertise.
Qualifications/member of professional body.
Independence/objectivity.
Reputation/previous experience of their work.
Use of auditor’s own expert.

Question 6

look at question bank, question 89.6, page 155

Answer 6

look at question bank, question 89.6, page 553