Professional and Ethical considerations, quality mgmt & practice mgmt Flashcards
Kandinsky- Going Concern- alternatives to a creditor’s voluntary liquidation and the implications of these.
1.5 m for each point explained
Insolvency and Operational Difficulties:
- Viola Ltd’s net liabilities indicate insolvency, implying insufficient funds to cover liabilities upon asset disposal.
- To avoid liquidation amidst operational challenges, placing the company in administration is the best option.
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Administration Overview:
- Aim: Rescue the company as a GC with expert assistance while it continues operations under an appointed insolvency practitioner.
- Protection from creditors’ actions during restructuring.
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Administration Commencement:
- Without Court Order: Directors, company (majority shareholders), or qualifying floating charge holders can initiate administration, subject to company articles or terms of floating charge(Bank may have right to appoint administrator, must notify).
- With Court Order: Involves application by majority shareholders, directors, creditors, or judicial authorities. Will grant if unable to pay debts.
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Moratorium Benefit:
- A moratorium over debts prevents creditors from enforcing debt collection during administration, providing Viola Ltd breathing space to resolve issues.
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Statement of Affairs and Proposal:
- Directors prepare a statement detailing assets, liabilities, and creditor information.
- Administrator proposes rescue plan or liquidation based on viability, sent to shareholders and creditors for acceptance.
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Decision Process:
- ‘Deemed consent’ for proposed decisions unless objections from 10% or more creditors by value.
- Virtual meetings or electronic communication may be used for creditor consent.
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Impact on Directors and Employees:
- Directors lose control; operational decisions made by administrator.
- Employees retain jobs unless redundancies are necessary for company survival.
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Voluntary Liquidation:
- Alternative to administration; initiated by creditors or members.
- Requires directors’ declaration of solvency, which seems unlikely for Viola Ltd due to its net liabilities position.
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Conclusion:
- Recommendation: Place Viola Ltd in administration for creditor protection and comprehensive consideration of the company’s future.
Kandinsky- Going Concern- Procedures to be performed - Ability to meet obligations.
2.5 marks for gc matter identified and explained
Relevant Calculations 1 mark.
* Revenue, op margins & profitability
* Bank loan
* Trade payables
* Borrowing facility
*Contingent liability
1 mark for each well explained procedure.
- Obtain & review mgmt accts for period after reporting date & any interim financial accounts which have been prepared.
- Perform analytical review to ascertain the trends in profitability & cash flows since the year end.
- Read the minutes of the meetings of shareholders, TCWG and relevant committees for reference to trading and financing difficulties.
- Discuss w. mgmt the strategy which is being developed to halt the trend in decining sales & evaluate the reasonableness of strategy in light of the economic recession & auditor’s knowledge of business.
- Review the company’s current order book & asses the level of future revenue required to break-even/make a profit.
- Analyse & discuss CF, profit & other relevant forecasts w. mgmt and review assumptions to ensure they are in line w. mgmts strategy & auditors’ knowledge of the business.
- Perform sensitivity analysis on the forecast financial information to evaluate the impact of changes in key variables such as interest rates, prediction of sales patterns and timings of cash reciepts from customers.
- Review post-reporting date financials and interim accounts; perform analytical review.
- Check minutes for references to financial difficulties; discuss mgmt strategy andd future revenue.
- Analyze forecasts, perform sensitivity analysis, assess trade payable’s payment period.
*Obtain contract of borrowing facility and confirm convenant measures in borrowing facility;
* Review bank correspondence & loan agreement to gauge bank’s level of support for Kandinsky Ltd and evidence of deterioriating relationship.
*Review bank loan agreements to confrim amount of loan, i/r and repayment dates and whether charge over assets is specific or general in nature.
- Review bank loan agreement for any clauses or covenants to determine breaches.
- Obtain letter of support in relatio to the suppolier to confirm the conditions under which K would become liable for debt.
- Dicuss w. mgmt implications of giving letter to supplier.
- Obtain details of contingent liability, discuss w. mgmt and review.
Define performance audit and performance information
Performance audits: to provide mgmt. assurance and advice regarding effective functioning of operational activities
Performance Info: Info published by public sector bodies regarding their objectives & achievement of those objectives.
Suggest performance targets that could be measured for following public sector organisations:
Police
Hospital
Council
Local PD:
* Reduce no. of crimes by x%
* Reduce no. of offenders re-offending by X%
* Reduce no. of deaths caused by dangerous driving x%
* Increased public satisfaction to x%
Local Hosp:
* Reduce emergency department waiting times to a max of x hours.
* Reduce maximum waiting time for an operation to x week.s
* Reduce the number of infections contracted in the hospiral by x%
* Reduce the no. of readmissions by x%
Local Council:
* Increased public satisfaction to x%
* To build x number of council houses in x years
* To spend x$ on road maintenance and improvements each year
* To increase council tax by a minimu of the rate of inflation
What stakeholder groups may relay on performance information produced by PubOrgs and how?
Police
Govt/Home office-
*Ensure PD achieve target.
* To report to tax payers on how govt money in this area is being used to achieve the stated obj.
Local Residents-
* Inform as to lvl of crime to assess performance
Prospective residents
* May use such information to decide whether to move to a particular town/city. If the crime rate is high they may decide not to move there.
Local Hosp
Local Residents-
* Assess performance incase admitted.
Patients awaiting treatment-
* Give ability to choose best performing or quickest.
Govt/Home office-
* Ensure policy targets met
* Report to tax payers how funds ae spent.
What difficulties do auditors encounter when auditing performance information?
Completeness
* All relevant incidents may not be reported or may be miscategorised.
Accuracy
Internal controls must exist to prevent miscaterisation and ensure accuracy.
Ambiguity of Targets
Targets may be ambiguous and interpretation may lead to misrecording.
Comparability
This may result in difficulty in comparing like with like.
Risk of falsification
Might be incentivised to falsify if failing. Difficult to detect where collusion unless alternative forms of corroborative evidence to highlight discrepancies.
Forsythia Group 59- Quality Mgmt & Other professional matters identified - recommended actions
General 1mark
* Intro/ EQR required as company is listed (ISQM 1)
* Additional Procedures.
Acquisition of Robin Co
* Subsequent event, significant to group revenue- necessitates disclosure in FS.
* Audit partners deferring to CFO potentially indicates lack of Prof Scepticism
Audit Planning Revisit
* ISA 300 requires updating audit strategy & plan as necessary during audit course.
* Acquisition warranted modificaition of audit procedure to ensure sufficient evidence gathering.
Delegation to Camelia Associates:
* Requires review and validaton of work- further evidence required.
* Problematic due to lack of knowledge, resources and competency issues.
* Revenue contains risk of fraud so problematical to delegate area.
Development Expenditure
* Capitalised development costs raise concern for inappropriate treatment to increase profit.
* Assignment of audit task to junior member inappropriate as due to complexity further review & evidence gathering needed
Yew Co
*Likely to require being visited for audit procedures to be performed. (3m)
* Not engaging consulatant to save cost is inappropriate ISQM1
* Possible that some risks not identified.
* Audit strategy and audit plan should not be changed w.o justification & documentation.
* Possible integrity issue due to deleting audit working papers
* Overall conclusion on quality of work performed.
62.Weston & Co- Tendering
Matters to be included in audit proposal:
Outline of Weston & Co
* Description of firm’s services & intl locations
* Emphsasis on experience in auditing recruitment companies.
Identify audit requirements of Jones
* Outline of statutory audit requirement.
* Explanation of regulatory framework & duties of auditors & mgmt.
Audit Approach
* Proposed audit approach & methodology
* Emphasis on through testing of OB & comparatives
* Risk- based natures of audit methodology & assessment internal controls.
Communication
*Description of communications w. governance
*Value added from communications, e.g. control deficiency recommendations.
Deadlines
* Clarification of audit timelines, aiming for completion w.in 4 mths of year end.
Ability to provide insight & add value:
* Demonstrated ability to provide strategic advice & insight.
* E.g. & testimonials from other clients.
Quality mgmt & ethics
* Adherence to ACCA Code of Ethics & international Standards on Quality Mgmt.
* Assurance of unbiased & credible auditor’s report.
Additional non-audit & assurance services
* Description of non-audit services such as business consultancy & corporate finance advice.
* Emphasis on separation from audit service & adherence to ethical requirments.
Matters to be included in determining audit fee:
Cost of Providing service:
* Evaluation of audit team costs including number & seniority of team members.
* Consideration of auditor’s engagements costs if necessary.
* Use of standard charge-out rates to estimate total fee.
* Inclusion of other costs such as travel expenses.
Client expectations
* Jone’s desire for low fee has ethical implications.
* Risks associated w. low audit fees compromising audit quality.
* Discussion of lowballing practice & its impact on long-term sustainability.
Contingent Fee
* Jone’s suggestion of linking audit fee to the company’s expansion succes.s
* This is contingent fee and causes self-interest threat.
* Firm’s stance on not entering into contingent fee arrangements.
* Explanation of factors determining audit fee based on audit work & team composition.
62.Weston & Co- Ethics- Long association
Diminished Professional Scepticisim:
* Long-term involvement leads to accepting client’s methods w.o questioning.
Familiarity & self-interest Threats:
* Close relationship fromation between senior auditor & client’s personnel.
* Loss of professionl scepticism exarcebates familiarity threat.
Evaluation & Sageguards
Factors for evaluating threat significance:
* Seniority of auditor
* Length of time involved w. the client.
* Nature, frequency, and extent of interactions w. client’s mgmt.
* Changes in client’s mgmt team.
Examples of Sageguards:
* Rotating senior personell of audit team.
* Independent review of senior personnell’s work by a professional accountant not part of team.
* Regular independent internal or external quality reviews of the engagement.
Specific Actions for Listed Companies (e.g., Ordway Co)
* Removal of Bobby from audit team & cessation of further contact w. the client or audit process.
* Five- year prohibition of Bobby in the audit of Ordway plc.
* Prohibition on Bobby’s role as engagement quality reviewer or Ordway pics audit until the coolingoff period is completed.
Legal & Professional Code Requirements:
* IESBA Intl Code of Ethics stipulates a cooling-off period for key audit partners in public interest companies like Ordway Co.
* Cooling- Off period includes restrictions on audit participation, quality reviews, and consultation regarding technical or industry-specific issues.
