Mock Q

Question 1

Your firm is the external auditor of Nessie Ltd (Nessie). Nessie and Klingon Ltd
(Klingon) are competitors engaged in the manufacture of mobile phones. On
1 December 2023, Nessie received notification of legal proceedings against it by
Klingon for an alleged infringement by Nessie of a number of patents granted to
Klingon.
Explain why your firm should consider this matter during the audit of the financial
statements of Nessie for the year ended 31 October 2023. (4 marks)

Answer 1

Why the matter should be considered
 damages could be payable
– may be material
– may not be reflected in the financial statements
– if probable
 provision required
– if possible
 disclosure as a contingent liability
 implications for management integrity/control environment
 may affect going concern status
 modified report may be required. (4 marks)

Question 2

Audit briefing not held - why an error and what should have been discussed

Answer 2

Why identified
It is a requirement of ISA (UK) 220 (Revised) that a briefing meeting is held prior to starting audit fieldwork. The meeting reduces the risk of issuing an inappropriate opinion as it allows juniors the opportunity to raise questions and understand their role in the audit. The issues discussed at the meeting should be documented.
Matters that should have been discussed
 background information about the client and its industry, including any applicable laws and regulations
 relevant ethical requirements including the importance of independence and objectivity
 the importance of professional scepticism
 areas of key audit risk, including any:
– susceptibility to misstatement due to fraud and how fraud might occur
– going concern considerations
– points forward from the prior year
 business risks and how they impact on the financial statements
 objectives of the work to be performed
 how the audit plan addresses the risks identified
 materiality/performance materiality thresholds
 how the audit work is to be assigned to members of the audit team and how to raise issues, arising
 changes in financial reporting requirements
 the timetable for completion of audit work.