March 2017 exam short form Qs Flashcards
Your firm is the external auditor of Shan plc (Shan), a large listed entity. The directors of Shan
have requested that your firm undertakes an additional engagement to value the company’s
investments for inclusion in the financial statements for the year ending 31 March 20X7. Shan’s
investments are a material proportion of the company’s total assets.
Requirements
State, with reasons, how your firm should respond to this request.
(3 marks)
Firm’s response and reasons
Refuse the request
Not permitted by the FRC’s Ethical Standard
Investments are material to FS
Threat to independence/objectivity
Self-review threat, firm may:
* over rely on valuations during audit
* be reluctant to identify a misstatement in the valuation
Management threat:
* engagement may involve making decisions/subjective judgement
* firm’s views may be too closely aligned with management’s
Explain the importance of professional scepticism in the context of an external audit
engagement.
(3 marks)
Importance of professional scepticism
Professional scepticism is:
* having a questioning mind
* being aware of conditions which may lead to misstatement
* making a critical assessment of audit evidence
ISA (UK) 200 requires auditors to plan/perform audits with professional scepticism because:
* management may deliberately conceal fraud/error; and
* be biased in the preparation of the FS
* evidence may not be reliable
* items can be complex or involve judgement
Professional scepticism ensures:
* sufficient inquiry/challenge of management
* reliability of documents/responses is appraised
* contradictory evidence is followed up
* conditions that indicate possible fraud are identified/followed up
* alternative treatments in the FS are considered
* the risk of an inappropriate opinion is reduced
List the key purposes of:
* an engagement quality control review; and
* monitoring (‘cold’ audit file review).
(3 marks)
Key purposes of EQCR
For higher risk and listed clients, the EQCR provides an independent check:
* on significant judgements made by audit team
* that appropriate consultations have taken place
* that proposed audit report is appropriate
* that engagement team is independent
Key purposes of monitoring
A continuing part of quality control procedures designed to:
* ensure policies and procedures are operating effectively
* identify areas where changes to policies/procedures are needed or additional training is
required
* assess effectiveness of review procedures
* assess compliance with ISAs and the FRC’s Ethical Standard
Your firm is the external auditor of Munkee Ltd (Munkee) for the year ending 31 March 20X7.
Jade Vachir, Munkee’s sole shareholder and managing director, has informed the engagement
partner that she intends to sell her shares after the year end and has started negotiations with a
prospective buyer.
Requirement
Explain why this information should be considered by the engagement partner for the external
audit of Munkee for the year ending 31 March 20X7.
(4 marks)
Why information should be considered as part of external audit
Increased risk of misstatement/increased inherent/control risk:
* Window dressing/manipulation of FS
* Jade will want to achieve highest possible valuation
* Likely to overstate assets/income/profit and understate liabilities/costs/ losses
* Jade may overly focus on negotiations rather than running the business
Increased detection risk:
* Jade may be motivated to conceal information from the auditor
Firm will need to reflect increased risk of misstatement in its audit approach:
* Lower materiality thresholds
* Larger sample sizes
* More experienced staff
* Increased level of professional scepticism
* Increased supervision/EQCR
Increased engagement risk:
* Possible reliance by prospective buyer on the FS for year ended 31 March 20X7
* Prospective buyer could sue the firm if they can prove a duty of care was owed
During the external audit of Martial Ltd (Martial) for the year ended 31 January 20X7, you
discover a letter to Martial dated 15 February 20X7 from its largest customer, Artz Ltd (Artz).
The letter threatens the early termination of Artz’s contract with Martial due to issues over the
quality of goods supplied.
Requirement
Explain the relevance of this letter to the external audit of Martial for the year ended 31
January 20X7.
(3 marks)
Relevance of letter
Further audit procedures are required due to:
* increased risk to going concern status
– Artz accounts for a significant proportion of revenue
– damage to Martial’s reputation
– issues with sales to other customers
* adjustments may be required for refunds/inventory write-downs
Break-up basis/disclosure of uncertainty may be appropriate
May result in a modified audit report
You are the audit senior responsible for the external audit of Crock Ltd (Crock) for the year
ended 31 December 20X6. The directors of Crock have refused to provide a written
representation that all transactions have been recorded and reflected in the financial
statements. The audit junior has suggested that an emphasis of matter paragraph is included
in the audit report to highlight to users of the financial statements that the written
representation has not been provided by the directors.
Requirement
State, with reasons, whether the audit junior’s suggestion is appropriate and outline the impact
on the auditor’s report of the directors’ refusal to provide the written representation.
(4 marks)
Audit junior’s suggestion
Emphasis of matter is only appropriate to draw users’ attention to matters presented or
disclosed in FS that are fundamental to users’ understanding of the FS.
Audit junior’s suggestion is inappropriate as situation does not meet these criteria.
Impact on auditor’s report
* Auditor is unable to obtain sufficient appropriate evidence
* Matter is pervasive as it could impact FS as a whole
* Modified opinion
* ISA (UK) 580 requires a disclaimer of opinion
* Include explanation of matter in basis for disclaimer of opinion section
* Report by exception/not received all info and explanations
