Regulatory and Professional Considerations and Practice Management

Question 1

Forsythia- Quality Management- Acquisitons

Answer 1

• Quality management standards, including ISQM 1, require an Engagement Quality Review (EQR) for listed entities like the Forsythia Group.

- Acquisition of Robin Co:
* Acquisition of Robin Co is a non‐adjusting subsequent event

• Audit partner ignoring the event indicates lack of knowledge or desire to minimise audit costs
• Leadership of Magnolia & Co is responsible and accountable for audit quality as it is an audit partner who is at fault here, this suggests potentially wider quality issues within the firm
• Budget constraints are impediments to professional scepticism
• Audit planning should be revisited when new information come to attention of auditor
• Lack of competence/deliberate omission of information increases risk of material misstatement
• Audit procedures should be performed on this issue as a matter of urgency
• Implication for auditor’s opinion if necessary, disclosures not made
• Discussion with the Group audit committee to discuss the disclosures to be made in the financial statement

Question 2

Forsythia- Quality Management- Audit Planning

Answer 2

**- Audit Planning:
** - ISA 300 mandates updating the audit plan as necessary during the audit, particularly in response to significant events like the acquisition of Robin Co.
- Delegation to Camelia Associates:
- Proper review of Camelia Associates’ work is required; their competence and objectivity should be assessed.
- Delegating audit of revenue, a high-risk area, without proper review raises concerns about the quality of audit evidence.

**- Development Expenditure:
**
- Inadequate audit evidence regarding capitalization of development costs necessitates further procedures.
- Assignment of complex tasks like auditing development expenditure to junior members contravenes ISQM 1 and raises concerns about competence and capability.

**- Yew Co:
** - Significant reduction in Yew Co’s assets requires further audit scrutiny, as per ISA 600.
- Failure to identify Yew Co as significant in the previous year’s audit raises concerns about the audit process and risk assessment.

**- Conclusion:
**
- Concerns raised indicate deficiencies in engagement quality and adherence to ISA standards.
- Remedial actions should be designed and implemented per ISQM 1.
- Audit report issuance should be delayed until issues are resolved and sufficient evidence is obtained.
Overall, adherence to ISA standards, professional skepticism, and appropriate quality management are essential for ensuring audit quality in the Forsythia Group’s engagement.

Question 3

James & Co- Quality Management

Answer 3

- Cameron Co:

** - Internal audit:**
- Self-review threat and lack of professional skepticism.

  - The provision of both internal and external audit services by the same firm poses a self-review threat, compromising objectivity and skepticism. (1 mark)
  
- Insufficient audit work on internal controls including no understanding or evaluation of year-end controls obtained
  - The audit team failed to adequately assess internal controls, breaching ISA 315, which requires an understanding and evaluation of internal controls. The timing of control testing exacerbates the issue, as controls were not evaluated for the last eight months of the financial year, violating ISA 330. (1 mark)

- Group auditor evaluation of Carrey Associates:
- Lack of understanding of component auditor and failure to assess ethical threats
- The Group auditor failed to obtain an understanding of Carrey Associates, breaching ISA 600. This lack of understanding extends to ethical considerations, particularly regarding self-review and management responsibility threats. The departure of an audit partner to Carrey Associates doesn’t absolve James & Co from this responsibility. (2 marks)

- Use of local accounting rules:
- Failure to apply appropriate accounting policies across Group companies
- Cameron Co’s use of local accounting rules necessitates adjustments for consolidation purposes according to IFRS 3. The Group audit partner’s conclusion without further investigation indicates poor audit quality and insufficient evidence gathering. (2 marks)

**- Dean Co:
**
- Inappropriate use of Group materiality and insufficient audit evidence on financial asset valuation
- Dean Co’s individual financial statements should not be audited using Group materiality. The audit team’s reliance on an outdated valuation for the financial asset without verification demonstrates a lack of professional skepticism and competence. (2 marks)

**- Horner Co:
**
- Breach of laws and regulations and failure to assess implications on financial statements
- Horner Co’s breach of laws and regulations represents a significant audit issue, requiring evaluation of financial statement implications and potential reporting to those charged with governance at both subsidiary and Group levels. Failure to properly investigate and document the breach violates ISA 250. (2 marks)