September 2017 exam short form Qs

Question 1

Your firm is the external auditor of Buddy Ltd (Buddy). The directors of Buddy discovered a
fraud soon after the auditor’s report on the financial statements for the year ended 30 June
20X7 was signed. Some of Buddy’s employees had given unauthorised discounts on sales
made to their friends and families, which is not allowed by Buddy’s discount policy. The
amounts were not material to the financial statements but Buddy’s managing director has
expressed concern that your firm did not discover this fraud during the audit.
Requirement
Outline the responsibilities of your firm and Buddy’s directors in respect of this fraud and reach
a conclusion as to whether those responsibilities were met.
(4 marks)

Answer 1

Firm’s responsibilities
* Detection of material misstatements
* No obligation for the prevention of fraud
* Fraud not material to financial statements
* Therefore, firm not responsible for detection of it. Firm’s responsibilities have been met.
Directors’ responsibilities
Directors have primary responsibility for prevention and detection by:
* strong emphasis on fraud prevention/detection
* creating a culture of honesty and ethical behaviour
* active oversight by those charged with governance
* implementing a system of internal control
* monitoring control procedures
A policy was in place.
However, the system of controls failed.
Therefore, the directors’ responsibilities were:
* not fulfilled regarding prevention
* fulfilled regarding detection

Question 2

Your firm has identified that the total fees from the provision of audit and non-audit services to
Dachshund plc (Dachshund), a listed company, is expected to amount to 6% of the firm’s
annual fee income in 20X7.
Requirement
State, with reasons, the steps that the engagement partner of Dachshund should take,
including any safeguards that might be necessary.
(3 marks)

Answer 2

Steps
* Establish amount of regular/recurring fees
* If exceed 5%: Safeguards required
* Disclose to ethics partner and those charged with governance
* Apply independent internal quality control review to audit
* Take steps to reduce work undertaken/fees if necessary
* Continue to monitor % of fee income to ensure recurring fees do not exceed 10% threshold
Reasons
* Potential self-interest threat to objectivity
* Over-reliant on fees from Dachshund/fear of losing client
* Reluctant to issue modified opinion

Question 3

Sphynx plc (Sphynx) is an international engineering company. Your firm has accepted an
engagement to provide a limited assurance report on safety performance indicators included
in Sphynx’s published corporate responsibility report. One such safety performance indicator
is the number of workplace accidents by employees, per million working hours, at each of its
international engineering plants.
Requirement
List three procedures that your firm could perform in relation to the number of workplace
accidents performance indicator.
(3 marks)

Answer 3

Procedures in relation to workplace accidents performance indicator
* Evaluate the system for collecting/recording accident data
* Review results of monitoring procedures
* Visit a sample of sites to review source data/accident books
* Compare accidents by:
– location
– month
– prior year
* Perform media search/review of board minutes for any major accidents/incidents
* Inspect correspondence for evidence of claims
* Calculate expected total number of working hours based on number of employees
* Reperform KPI calculation

Question 4

You are working on the external audit of Snowball Ltd (Snowball) for the year ended 31 August
20X7. You are responsible for performing the planned procedures in respect of trade
receivables. Your analytical procedures identified that receivables days have increased from 35
days at 31 August 20X6 to 43 days at 31 August 20X7. On enquiry, Snowball’s financial
controller explained: “The increase is due to a contract for the supply of goods to a new
customer, Pets Ltd (Pets). The contract allows Pets 60 days’ credit rather than our standard 30
days’ credit. We despatched a large order to Pets 50 days before the year end.”
Requirement
Outline the additional audit procedures you would perform in respect of the financial
controller’s explanation.
(4 marks)

Answer 4

Additional audit procedures
* Inspect the contract with Pets to confirm credit terms are 60 days
* Inspect other contracts to confirm credit terms are 30 days
* Check date of contract with Pets
* Inspect records of goods despatched to Pets prior to year end
* Ascertain if amount was paid after year end
* Direct confirmation of balance with Pets
* Reperform trade receivables days’ calculation excluding Pets and ascertain if:
– days are in line with 30-day credit policy for other customers
– days are in line with prior year

Question 5

During your firm’s external audit of the financial statements of Sausage Ltd, the audit team has
identified a number of misstatements. No individual misstatement is material.
Requirement
Outline the actions that should be taken in respect of these misstatements before the auditor’s
report is signed.
(3 marks)

Answer 5

Actions before auditor’s report is signed
Consider whether:
* errors indicate other misstatements might exist
* aggregate of misstatements is material
* audit strategy needs to be revised
Communicate all identified misstatements to management
Request management correct the misstatements
Reassess materiality
Request written representation from management that it believes any uncorrected
misstatements are immaterial, individually and in aggregate
Document:
* amount below which misstatements regarded as trivial
* all misstatements accumulated
* whether corrected
* auditor’s conclusion on whether uncorrected misstatements are material
Consider impact on audit opinion

Question 6

The financial statements of Budgie Ltd (Budgie) include an investment in Viper Ltd (Viper)
stated at £7.8 million. The external auditor has concluded that the investment in Viper should
be recognised at £2 million. The directors of Budgie have refused to recognise the reduction in the value of the investment. The profit before tax of Budgie is £46.7 million and gross assets
are £824 million.
Requirement
State, with reasons, the implications for the auditor’s report.
(3 marks)

Answer 6

Implications for the auditor’s report
* Misstatement
* £5.8 million impairment
* Which is 12.4% of PBT Material
* Auditor’s report/opinion should be modified
* Not pervasive:
– 0.7% of gross assets
– not a substantial proportion/isolated to individual item in FS
* Qualified opinion/”except for”
* Explanation included in “basis for qualified opinion” section