September 2016 exam short form Qs Flashcards
Explain how the use of separate engagement teams mitigates the threats to compliance with
the fundamental principles, as set out in the ICAEW Code of Ethics, when an audit firm:
(1) provides non-audit services to an external audit client
(2) acts for competing clients
(4 marks)
Use of separate teams
Firm provides non-audit services to external audit client
Mitigates the self-review threat
* To independence/objectivity arising from
* Results of non-audit services reflected in the financial statements
Reduces risk of:
* Over-reliance on non-audit work during audit
* Reluctance to highlight errors/omissions in non-audit work
Which may result in an inappropriate audit opinion
Firm acts for competing clients
Mitigates threat to firm’s independence/objectivity arising from the potential conflict of interest
between clients.
Where the firm may not be able to act in the best interests of both clients
Reduces risk of:
* Breach of duty of confidentiality
* Leakage of information
* Use of information regarding one client for benefit of another client
Supplemented by information barriers between the separate teams eg, physical separation
and secure data failing
Ronnie San, a trainee ICAEW Chartered Accountant, is working on the external audit of Persow
Ltd (Persow). Ronnie previously worked on the external audit of Majin Ltd (Majin), a car fleet
management company. Persow is searching for a new car fleet management supplier and
Ronnie has proposed that his audit firm recommends Majin to Persow in return for a fee from
Majin for the introduction.
Requirement
Explain the ethical issues arising for the audit firm in respect of Ronnie’s proposal.
(3 marks)
Ethical issues
* Creates a self-interest threat to firm’s objectivity/independence
* Influenced by introductory fee
* Conflict of interest between firm and client
* May not be acting in the best interests of Persow if firm makes inappropriate
recommendation
* Advocacy threat as promoting client’s product
Bobby Core is an employee of Mem Ltd (Mem), an external audit client of your firm. Bobby has
informed the audit manager that some of Mem’s employees, working in the retail division, are
paid directly out of cash receipts. Bobby believes Mem’s retail manager is making these cash
payments to conceal the level of employee costs from senior management and to avoid
paying payroll taxes in respect of these employees.
Requirement
State the actions that should be taken by the audit manager in respect of the comments made
by Bobby.
(4 marks)
Actions to be taken by audit manager
* Consider reliability of information provided by Bobby
* Advise Bobby to pass information onto senior management/advise senior management of
the suspicions directly, but protect Bobby’s identity
* Revise or extend procedures if necessary and advise the audit team
* Consider whether there is:
– any material impact on the financial statements
– risk of other fraud/management integrity issues
* Document findings
* Determine whether the issue is money laundering
* Report to the firm’s MLRO
* Avoid tipping off
Your firm has been invited by Caul Ltd (Caul) to accept an engagement to examine and report
on prospective financial information (PFI). The PFI has been prepared by Caul’s directors to
help in evaluating capital investment for its factory in India.
Requirement
Identify the factors that will affect the calculation of your firm’s fee for this engagement.
(3 marks)
Factors affecting firm’s fee calculation
* Whether Caul is an existing client and if the firm has cumulative knowledge and experience
* Experience of investments in India
* Scope of engagement/period covered
* Estimated time to complete engagement
* Timeframe for work/priority and importance to client
* Level of experience of staff required
* Whether external experts required
* Extent of partner reviews required
* Whether visits to India will be necessary and associated costs
* Whether firm has representation in India
* Degree of risk
* Whether the firm’s report will be distributed outside of Caul, eg, reliance on the report by a
provider of finance
Emow Ltd (Emow), a national chain of estate agents, has applied to its bank for an increase in
its overdraft facility. The bank has requested a cash flow forecast for the year ending 30
September 20X7 and an independent examination of and report on the cash flow forecast.
Your firm has agreed to perform the independent examination and prepare the report.
Emow has 25 UK offices each of which charge customers a fee for selling their homes. The
standard fee is 2% of the house sale price achieved but each office can agree discounts with
individual customers. Customers pay fees to Emow on completion of each sale. House prices
vary in the UK depending on location. The UK housing market is also seasonal with more
houses available for sale between April and September compared with October to March
Requirement
For the independent examination of the cash flow forecast, state the specific matters you
would consider when examining fee income for reasonableness.
(4 marks)
Matters to consider when examining fee income for reasonableness
Breakdown of projected fee income over 25 offices
Higher receipts in April – September/lower receipts October – March
Fees consistent with:
* actual pattern of completions in previous years
* 2%/less than 2% of total projected sales value
* level of competition in market for local office
* rate of discounts in prior years
Sensitivity analysis re effect of different levels of discounts
Estimated sales values consistent with:
* market predictions about property prices in each locality
Realistic assumptions about:
* number of sales
* eg, sales reflect size of each office average time to complete
The International Auditing and Assurance Standards Board (IAASB) included monitoring of ‘the
various applications of data analytics and the relationship to the audit’ in its work plan for
2015/16.
The International Auditing and Assurance Standards Board (IAASB) included monitoring of ‘the
various applications of data analytics and the relationship to the audit’ in its work plan for
2015/16.
Impact of data analytics on conduct of an external audit
* Plan to monitor larger data sets/100% population, often on a continuous basis
* Identify anomalies for further investigation
* Planned audit evidence may include unstructured data sets
– Eg, emails/social media
* Need to plan to extract data from client systems
* Inclusion of data/IT experts in the audit team
