September 2018 exam short form Qs Flashcards
Island Ltd (Island) and Flint Ltd (Flint) are both external audit clients of your firm. Each
company has a year end of 30 September. In April 20X8, Flint contracted with Island for the
provision of services. Flint is dissatisfied with the quality of services provided by Island and is
currently taking legal action against Island. The outcome of the legal action will not be known
before the conclusion of both external audits for the year ending 30 September 20X8.
Requirement
Identify and explain the ethical issues arising from the situation outlined above and state how
your firm should address these issues.
(4 marks)
Ethical issues
Conflict of interest
Threat to objectivity
Unable to act in best interest of both clients
Threat to confidentiality
* Risk of information leakage
* Which could benefit Flint/Island in the legal claim
* Should not be used in reaching an opinion on either audit
How to address
Consult ethics partner
Disclose conflict of interest to both clients
Obtain both clients’ consent to continue to act
Separate audit teams
Confidentiality agreements
Clear guidelines for teams on security/confidentiality
Information barriers
* Physical separation of teams/separate offices
* Secure data filing
* Regular review of safeguards by senior individual not involved with clients
Your firm is the external auditor of Blackett Ltd (Blackett), an unlisted company, and its whollyowned subsidiary Coniston Ltd (Coniston). The audit fees for Blackett and Coniston are £4.2
million and £2.7 million respectively. Your firm also provides annual tax services to both
companies for a total fee of £1.6 million. During the current year, your firm performed a oneoff IT engagement for Blackett for a fee of £1.1 million. Your firm’s total annual fee income from
all its clients is £74.8 million.
Requirement
Explain what is meant by the self-interest threat in relation to the fee income, arising from the
circumstances outlined above, and state how your firm should address this threat.
(4 marks)
Self-interest threat
* Regular fees are 11.4% of firm’s annual fee income
* Fees should not exceed 15%
* Over-reliance on client for fee income
* Objectivity impaired
* Firm reluctant to issue modified opinion/challenge management
How to address
Disclose to ethics partner and those charged with governance
At 10% safeguards are required
External independent quality control review
Regular review of fee income to ensure threshold not breached
Take steps to reduce work/fees if necessary
Your firm is the external auditor of Captain Ltd (Captain) for the year ending 31 December
20X8. Your firm plans to use data analytics routines relevant to the audit of inventory. Captain
sells fashion goods from 3,000 retail stores located in 36 countries. The goods are purchased
from around the world and are invoiced in each supplier’s local currency.
Requirement
Describe three data analytics routines relevant to the audit of Captain’s inventory.
(3 marks)
Inventory data analytics routines
Compare the last time an item was purchased to the last time it was sold
Compare the year-end value with the post year-end selling prices
Reproduce the inventory ageing analysis
Match purchase orders, GRNs and purchase invoices
Compare inventory held by each store with the square metre of retail space for that store
Recalculate currency translations using third party exchange rates
Identify journal entries impacting inventory
look at question bank, question 69.4, pg 125
look at question bank, question 69.4, pg 470
Outline how the planned procedures for an engagement to review financial statements will
differ from the planned procedures in respect of an external audit performed under the
Companies Act 2006. Give reasons for the differences.
(2 marks)
Review of financial statements
Limited to inquiry, analytical and other review procedures
Less work than external audit (awarded once only)
External audit under CA06
Uses test of details/tests of control
Obligation to perform procedures re subsequent events
More work than review of financial statements (awarded once only)
Reasons
Review provides limited assurance and audit provides reasonable assurance
Review in accordance with ISRE 2400 and audit in accordance with ISAs
Engagement risk for review is higher/lower for audit
Your firm is the external auditor of Pirate Ltd (Pirate). During the current year, Pirate acquired
100% of the share capital of Oar Ltd (Oar), a company incorporated in the UK. The year end for
both companies is 30 June 20X8. Oar’s financial statements are being audited by Turner LLP
(Turner) and your firm intends to use the audit evidence obtained by Turner for the group
audit. Oar is a significant component of Pirate.
Requirement
Outline the procedures that your firm should undertake because of its intention to use the
audit evidence obtained by Turner for the year ended 30 June 20X8.
(4 marks)
Additional audit procedures
Obtain an understanding of Turner LLP
Ascertain:
* whether Turner is independent and will comply with ethical requirements
* Turner’s professional competence
* if the firm will be involved in audit work of Turner or will need to plan its own audit
procedures
Communicate with Turner:
* details of work to be performed
* form/content of communication
* materiality levels
* significant risks of fraud/error
* related parties
Request confirmation Turner will cooperate
Evaluate work of Turner
Determine impact of any errors on group financial statements
