SF Questions: Concluding and Reporting on Engagements

Question 1

The new auditor of a company has concluded that a material amount in the preceding year’s financial statements was included within an incorrect current asset heading.
The audit opinion was unmodified.

Requirement
Explain the auditor’s responsibilities in relation to the current year’s auditor’s report.

Answer 1

Incorrect classification last year 24.1
Comparatives form part of financial statements •
But no opinion on comparatives as such •
No effect on current year figures •
If comparatives not adjusted, should consider implications for report •
If comparatives adjusted and adequately disclosed, opinion not modified

Question 2

During the audit of Morgan Ltd audit tests indicated that company policy requiring purchase orders to be placed only by the company’s buying department was not adhered to in 10% of the transactions examined.

Requirement
In respect of the above breach in company policy, draft extracts suitable for inclusion in the auditor’s management letter, which set out the possible consequences and the recommendations that you would make.

Answer 2

Consequences

Duplicate orders •
Use of unauthorised suppliers •
Terms/prices negotiated with unauthorised suppliers generally less favourable •
Purchase of unauthorised non-business goods and services
Goods may not be to appropriate standards or requirements
May result in breach of budgets and loss of control by buying department •
Invoices may not be entered in purchase ledger, resulting in understated liabilities •

Recommendations

All significant purchase orders over pre-determined limit to be placed by buying department except for small orders (say under £1,000)
Employees in breach of company procedures to be informed in writing •
Circulate company policy to all staff, and staff to confirm in writing that they understand company policy
All suppliers to be informed in writing of company policy

Question 3

Your firm has recently been appointed as auditor to Donner Ltd for the year ending 31 October 20X5. This is the first year of audit for Donner Ltd as it fell below the statutory audit exemption limits for the year ended 31 October 20X4, which was the company’s first period of trading.

Requirement
State the matters to be considered in respect of the opening balances of Donner Ltd

Answer 3

Check opening balances correctly brought forward •
Review client working papers for prior year •
Check appropriateness of accounting policies/accounting policies consistently applied year to year
Any changes appropriately accounted for/disclosed •
Substantive work on opening balances (where no alternative available) •
State in auditor’s report that comparative figures not audited (ISA (UK) 710) •
Ensure disclosure of lack of audit in prior year in financial statements •
Integrity of accounting system/strength of control environment

Question 4

You have obtained external confirmations of receivables as part of your audit of Charnley Ltd for the year ended 31 October 20X0.

The following disagreements have been revealed:
1. A customer disagreed with the balance because it had sent a cheque on 27 October (20X0.
2 A customer had been promised a credit note against an invoice dated 5 October 20X0 because the wrong price had been charged, but this had not yet been issued.

Requirement
What further information will you require in order to conclude on the results of this test, and why will you require this information?

Answer 4

Further information and why required. 24.4
(1) Disagreement over balance:
Amount of cheque confirms balance outstanding •
Cheque received, banked and posted after year end •
To confirm as acceptable timing difference in conclusion •
(2) Promised credit note:
Provided for at year end = acceptable timing difference
Not provided for = error in conclusion of test •
Whether isolated occurrence or not •
For need to extrapolate or not in conclusion

Question 5

The directors of two companies, Fletcher Ltd and Dervish Ltd, have each prevented their auditors from carrying out procedures considered necessary to verify the amount of inventories held by third parties of £250,000.
In the audit of Fletcher Ltd materiality has been set at £200,000, and in the audit of Dervish Ltd materiality has been set at £15,000.

Requirement
State the effect this matter will have on the auditor’s report of each company.

Answer 5

Fletcher Ltd
Qualified opinion •
‘Except for’ •
Inability to obtain sufficient appropriate audit evidence •

Dervish Ltd
Disclaimer of opinion •
Unable to form opinion on true and fair •

Both
Description of circumstances/amounts

Question 6

The directors of Denzil Ltd are preparing the financial statements for the year ended 31 May 20X1, and have approached the auditors for advice because they are unsure whether the company can be considered a going concern.

State the importance of the going concern concept in the preparation of financial statements, and describe the effect on the financial statements if the company:

• is considered a going concern, although there are significant doubts about this.
• is not considered a going concern

Answer 6

Going concern is fundamental underlying assumption •
Assumption that business can continue operating for foreseeable future •
(1) Disclosure of:
- statement of relevant facts •
- nature of concern •
- assumptions made in using going concern basis •
- plans and actions taken •
(2) Not considered a going concern:
- Statement that accounts not prepared on going concern basis ie, prepared on a break up basis
- Assets written down to recoverable amounts •
- Liabilities re-assessed •
- And reclassified from long to short term

Question 7

During the course of the audit of Beacon Ltd for the year ended 30 November 20X2 you discovered that on 25 January 20X3 a liquidator was appointed at Gamlec Ltd, a major customer of Beacon Ltd. The balance due from Gamlec Ltd at 30 November 20X2 was £150,000.

Requirement
Identify the matters to which you would direct your attention after the reporting period date

Answer 7

• Consider whether provision in place •
• Whether any monies re amount outstanding received from Gamlec since reporting period date
• Correspondence from liquidator/likelihood of receipts •
• Whether any additional goods despatched to Gamlec •
• Whether liquidation of major customer will impact on going concern status of Beacon/provides evidence of problems in the industry

Question 8

The directors of Pinot plc have included the following note in the accounts for the year ended 31 December 20X3:
“The company reached agreement with its lenders, in October 20X3, to extend the maturities of its debt facilities until September 20X4, waive all existing covenant breaches and reduce interest costs.

All preconditions contained in the facilities agreement have now been satisfied.

The company is working on initiatives to significantly reduce its current debt levels and is to explore opportunities to raise further funds by September 20X4. Based on progress to date, the directors remain confident that the company will be successful in achieving its strategy.

While there can be no certainty, the directors believe that the adoption of the going concern basis is appropriate in the preparation of the financial statements.

If adoption of the going concern basis was not appropriate, adjustments would be required to write down assets to their recoverable value, to reclassify non-current assets as current assets and to provide for any further liabilities that might arise.”

Requirement
Describe, with reasons, the possible effects of this note on the auditor’s report for the year ended 31 December 20X3

Answer 8

Unmodified opinion if note considered adequate •
Material Uncertainty related to Going Concern paragraph •
Drawing users’ attention to note •
Statement that opinion not modified in this respect •
If note inadequate or disagree with basis of preparation – modified opinion

Question 9

Siskin Ltd conducts all its sales on a cash basis. The managing director and majority shareholder of Siskin Ltd has provided a written representation in respect of the completeness of cash sales.

Requirement
What additional matters would you consider in determining whether or not you would rely on this representation?

Answer 9

Whether to rely on written representation:

• Internal controls in place over cash sales/segregation of duties •
• Whether independent analytical review of GP%/reconciliations •
• Whether GP% in line with industry sector
• Integrity/attitude of MD/well informed •
• Lifestyle of MD in relation to stated income •
• Whether audit testing consistent with representations

Question 10

During the audit of Poplar Ltd for the year ended 31 January 20X3 you have been assigned the responsibility of checking the cash at bank figure in the statement of financial position.

While checking the bank reconciliation you discovered that receipts from customers, listed as outstanding lodgements at the year end, were cleared through the bank on 14 February 20X3.

Requirement
Explain why this matter should be investigated further.

Answer 10

• Cash book may have been left open after year end (inappropriate cut-off)/overstatement of cash/impact on trade receivables collection period
• Management to be informed of delay in banking •
• Poor cash management/cash flow –
• Teeming and lading (delayed accounting fraud)

Question 11

You are the auditor of Bomburst Ltd (Bomburst). An extract from the directors’ report states:
‘The company always adheres to its policy to comply with the terms of payment agreed with suppliers.’
However, during your audit work on the year-end trade payables balance you found evidence of a number of suppliers requesting payment from Bomburst on overdue invoices.

State the actions you would take and outline the implications for your auditor’s report.

Answer 11

Actions 24.11

• Discuss with directors the inconsistency between directors’ report and auditor’s understanding of the entity
• Ascertain if there is a legitimate reason for the inconsistency
• if the auditor’s understanding is incomplete or incorrect, then consider whether further audit evidence needs to be obtained in relation to trade payables
• If there is no legitimate reason for the inconsistency, ask the directors to change the directors’ report
• If the directors refuse to change the director’s report, consider whether this raises doubt about their integrity and the reliability of audit evidence
• Bring the matter to the attention of the audit partner •
• If issue cannot be resolved through discussion, ask directors to seek legal consultation •
• Notify directors in writing of concerns/document reasons •
• Obtain own legal advice •
• Use right to be heard at AGM to notify shareholders of inconsistency •
• In extreme, might consider resignation and circulation of statement of circumstances •
• Implications for auditor’s report

Describe the inconsistency in the ‘Opinion on other matters prescribed by the Companies Act 2006 section’ of the auditor’s report

• Auditors are also required to include a section headed “Matters on which we are required to report by exception”
• The auditor should describe the misstatement regarding Bomburst’s compliance with suppliers’ payment terms in this section

Question 12

Your firm has been engaged by the directors of Bilko Inc (Bilko), a company based overseas, to undertake a review of and provide an assurance report on the year-end financial information of its UK branch.

The terms of the engagement include making enquiries of management, applying analytical procedures to the financial information and assessing whether the accounting policies and presentation have been consistently applied unless otherwise
disclosed.

Requirement
Outline the matters to be included in your firm’s assurance report to the directors of Bilko to ensure that the purpose and scope of the engagement is clear.

Answer 12

Responsibility of management
– to prepare the financial information •

Responsibilities of practitioner •

• To provide limited assurance –
• Financial information free from material misstatements –
• Limited to enquiries and analytical procedures –
• Not an audit –
• Do not express an audit opinion –
• Reference to standards/criteria (eg, ISRE 2400 Engagements to Review Historical Financial Statements)

Conclusion •
Expressed negatively –
‘Nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view’
- Disclaimer of responsibility – do not accept or assume responsibility to anyone other than the company

Question 13

Your firm has completed the external audit of the financial statements of Roses Ltd (Roses) for the year ended 31 December 20X9 and an unmodified auditor’s report was signed by the engagement partner on 1 March 20X0.

Your firm’s auditor’s report has been provided to the directors who plan to issue the financial statements and auditor’s report to the shareholders on 30 March 20X0.

While reading today’s newspaper, 23 March 20X0, you discover that Meadow Ltd (Meadow), a major customer of Roses, went into liquidation on 15 March 20X0.

You were the audit senior on the audit of Roses and you recall that Meadow owed a material amount to Roses, at 31 December 20X9, for goods purchased. This amount remained outstanding at the conclusion of the subsequent events review.

You have informed the engagement partner of your discovery.

Requirements
Discuss the issues arising as a result of the newspaper article and state what, if any, action your firm should take.

Answer 13

Liquidation of customer is a material adjusting subsequent event •
The audit firm has no responsibility to search for subsequent events after the auditor’s report is issued but needs to consider action where it becomes aware of material facts affecting the financial statements

The firm should discuss with management its intentions regarding any amendments to the financial statements

Perform procedures to ascertain if any amount is recoverable, eg, review correspondence with liquidators

Carry out procedures to ascertain the impact of a loss of major customer on the going concern basis of accounting

If management amend the financial statements the firm should undertake audit procedures in respect of those amendments and reissue the auditor’s report accordingly on the new financial statements

If management refuse to amend the financial statements and auditor agrees then no further action is necessary

If the auditors consider the financial statements are no longer true and fair in the absence of any amendments they should request that management do not issue the financial statements

If management do issue the financial statements then the auditors need to prevent reliance by the shareholders on the audit opinion

Auditors could use their right to speak at the company’s AGM •
Or resign and have written representations circulated to shareholders •
Auditors should also obtain legal advice if the directors refuse to make necessary amendments

Question 14

Describe the auditors’ responsibilities, in the UK, with respect to forming and reporting their opinion on a directors’ report which is included in a company’s annual report containing financial statements.

Answer 14

Auditor should read other information in annual report including the directors’ report •
Both the Companies Act 2006 and ISA (UK) 720

The Auditor’s Responsibilities Relating to Other Information require the auditor to state in its report on the company’s annual accounts whether, in its opinion, the information given in the directors’ report is consistent with the financial statements

Where the information given is consistent the auditor should state this in the ‘Other information’ section

Where the auditor’s opinion is that the directors’ report contains an uncorrected material misstatement, then the auditor shall explain the nature of the inconsistency in the ‘Other information’ section

Question 15

You are the audit senior on the external audit of Dug Ltd (Dug) for the year ended 31 January 20X1. In January 20X1 Dug sold some office equipment to the wife of Dug’s managing director.

The audit junior has noted that the sale has not been disclosed in the note to the financial statements detailing related party transactions and has suggested the inclusion of an emphasis of matter paragraph in the auditor’s report to highlight this issue.

Requirement
Comment on the suitability or otherwise of the audit junior’s suggestion

Answer 15

Failure to disclose a material related party transaction results in a material misstatement in the preparation of the financial statements.

Therefore, the audit opinion should be modified with a qualified (except for) opinion, and the reason for the material misstatement in the auditor’s report should give details of the related party transaction.

An emphasis of matter paragraph is used where the auditor considers it necessary to draw users’ attention to a matter which is presented correctly in the financial statements but where the audit opinion would not be qualified in respect of the matter in the emphasis of matter paragraph.

The audit junior’s suggestion is therefore unsuitable, an emphasis of matter paragraph is not appropriate.

Question 16

During the external audit of Eagle Ltd (Eagle), the audit senior discovered that the company 24.16
does not undertake periodic reconciliations of the plant and equipment register with the physical assets.
Requirement
Prepare notes, in readiness for drafting the audit firm’s report to the management of Eagle, which outline the possible consequences of this internal control deficiency and provide recommendations to remedy the deficiency.

Answer 16

• Assets recorded in the register may not exist or may have been stolen •
• Assets in existence, acquisitions or disposals may not be recorded •
• Incorrect capital allowances may be claimed •
• Assets may be fully written down but still in use and consequently undervalued •
• Assets may be impaired or no longer in use and consequently overvalued •
• Depreciation charges on assets may be inappropriate •
• Resulting in misstatements in the financial statements •

Recommendations

• Regular/monthly/quarterly reconciliation of register and assets •
• Physical to register to ensure completeness of recording –
• Register to physical to ensure existence and in good condition –
• Reconciliation to be performed - independent of custodian •
• Differences to be reported and investigated •
• Train staff on how to carry out procedures •
• Monitoring of procedures to ensure checks undertaken

Question 17

Your firm is the external auditor of Weaver Ltd (Weaver), a marketing agency, for the year ended 30 June 20X1. During the audit of work in progress, you discover that 20% of the work in progress balance relates to completed marketing projects which were delivered to clients more than three months before the year end and had not yet been invoiced

Prepare notes, in readiness for drafting your firm’s report to the management of Weaver, which outline the possible consequences of this significant internal control deficiency and provide recommendations to remedy the deficiency

Answer 17

Consequences 24.17

• Delays in invoicing weakens the cash flow of the business and may result in future cash flow difficulties or issues over going concern
• There is an increased risk of non-payment by clients once invoicing has taken place or that invoicing will never take place
• This will lead to reduced profitability and may damage the company’s relationship with clients if invoicing is persistently late

Recommendations

• Implement and communicate to all staff a company policy regarding the amount of time that is acceptable between handing over of a project to a client and the client being invoiced
• Require that project managers notify the accounts department immediately when a project is handed over to a client
• Introduce a system of stage payments throughout projects, particularly for long projects
• Account managers should hold monthly meetings with the finance director to assess the level of unbilled work in progress
• The finance director should review an analysis of aged work in progress on a monthly basis
• Regular monitoring to ensure procedures are followed

Question 18

Your firm is the external auditor of Dawn Ltd (Dawn), a manufacturer of office furniture. As part of your work on trade payables you discovered that the company does not keep a list of approved suppliers from which to purchase its raw materials.

Requirement
Prepare notes, in readiness for drafting your firm’s report to the management of Dawn, which outline the possible consequences of this significant internal control deficiency and provide recommendations to remedy the deficiency.

Answer 18

Consequences 24.18

• The quality of raw materials may be inappropriate
• Dawn may not benefit from most favourable prices
• Absence of an approved supplier list increases scope for fraudulent acts by staff ordering goods

Recommendations

• Compile an approved supplier list by researching price lists of suppliers for best rates, quality of products from each supplier, availability of bulk purchase discounts, suppliers’ ability to meet delivery requirements
• Final supplier list to be approved by senior management
• Communicate approved supplier list to staff responsible for ordering
• Require that when orders are authorised the supplier is checked against the list and any instances of non-compliance are notified to management
• Take disciplinary action where staff are found to have ordered from suppliers not on the list
• Supplier performance to be monitored and the approved supplier list to be updated on a regular basis

Question 19

Putter Ltd, a manufacturer of electrical appliances, has included a provision for warranties in its financial statements.

Requirement
List the procedures you would undertake between the year end and the date of the auditor’s report in respect of the provision for warranties

Answer 19

Procedures 24.19

• Assess whether warranty claims are consistent with management expectations by inspecting post year-end:
• Customer correspondence •
• Board minutes •
• Goods returned records •
• Records of repair costs •
• Amounts paid/refunds under warranty - Internet searches for evidence of issues with products

Obtain written representation from management

Question 20

During the course of the external audit of Green Ltd (Green), it was discovered that, on a number of occasions, sales staff granted customer discounts in excess of authorised levels.

Requirement
Prepare notes, in readiness for drafting the audit firm’s report to the management of Green, which outline the possible consequences of this significant internal control deficiency and provide recommendations to remedy the deficiency

Answer 20

Consequences
Loss of revenue/profits •
Adverse impact on cash flow •
Inconsistent pricing could lead to customer dissatisfaction •
Overpayment of sales staff if remuneration is target driven •
Collusion between customer and staff/kickbacks •

Recommendations

Employees to be made aware of the importance of adhering to company policy •
Any ‘extra’ discount (to clinch a sale) to be authorised by sales manager •
Monitoring of procedures to ensure adherence •
Breaches to be investigated and staff disciplined •
If relevant, limit controls on tills to prevent discounts above authorised levels

Question 21

Your firm is the external auditor of Brown plc (Brown). You have reviewed the chairman’s statement to be included in Brown’s annual report, with the audited financial statements, for the year ended 30 June 20X2. Your review has identified that key financial ratios contained in the chairman’s statement are inconsistent with the audited financial statements.

Requirement
Identify the actions that your firm should take to address this issue

Answer 21

Highlight inconsistency to management/Chairman 24.21
- Ascertain reasons for inconsistency determining whether financial statements or Chairman’s statement require revision
- If inconsistency due to error in financial statements firm may need to modify its audit opinion
- If inconsistency due to error in Chairman’s statement should request client to amend
Chairman’s statement
- If client amends – no further action required •
-If client refuses to amend: •
- Inform those charged with governance –
- Describe the misstatement of the Chairman’s statement in the ‘Other information’ section of the auditor’s report
- Consider whether the refusal raises doubt about the integrity of management or those charged with governance and the reliability of audit evidence
- Seek legal advice
- If matter considered extreme, withdraw from engagement
Speak to members at AGM

Question 22

During the external audit of Stamp Ltd (Stamp) for the year ended 30 September 20X2, it was discovered that plant and equipment, included in the statement of financial position at £200,000, was sold for £150,000 on 5 October 20X2. The directors refuse to adjust this figure on the grounds that the item was sold after the year end. The draft financial statements for the year ended 30 September 20X2 show profit before tax of £450,000 and total assets of £980,000.

Requirement
State, with reasons, whether or not you would modify the audit opinion on the financial
statements of Stamp

Answer 22

£50,000 difference between carrying amount and sale proceeds
= 11.1% of profit before tax
= 5.1% of total assets
therefore material

Indicative of impairment at year end/conditions at year end therefore adjusting event •
Represents material misstatement •
Modified opinion/qualified/except for opinion •
Isolated to one area therefore matter is not pervasive

Question 23

During the subsequent events review on the external audit of Mono Ltd (Mono) for the year ended 30 April 20X3, it was discovered that inventory, which was included in the statement of financial position at a cost of £100,000, was sold for £75,000 on 12 May 20X3.

The management of Mono has refused to make any adjustment to the financial statements in respect of this matter. The draft financial statements for the year ended 30 April 20X3 show a profit before tax of £225,000 and total assets of £490,000

Requirement
State, with reasons, the action which should be taken by the external auditor in respect of this matter.

Answer 23

The difference of £25,000 between cost and net realisable value (NRV) is: 24.23
11% of PBT •
5.1% of TA •
Therefore material •
Adjusting subsequent event •
Provides evidence of conditions at year end •
Material misstatement/overstated assets •
Modify/qualify audit opinion/except for •
Not pervasive •
Confined to specific elements of financial statements

Question 24

Reporting accountants are required to obtain written representations from management when performing an engagement to examine prospective financial information.

Requirement
List the representations that should be obtained and explain why they are required

Answer 24

Intended use of prospective financial information (PFI)

• To ensure there are no unforeseen users of the PFI •
• Which could impact on the risk associated with the engagement or the extent of the reporting accountant’s liability
• Completeness of significant management assumptions
• Facts/knowledge regarding assumptions for PFI will be largely confined to management
• Reporting accountant cannot undertake examination of PFI unless all assumptions are adequately disclosed
• Reporting accountant reports on ‘reasonableness’ of assumptions and therefore needs confirmation they are complete
• Management accepts responsibility for PFI
• Reduces expectation gap/avoids misunderstandings regarding responsibilities •
• The reporting accountant is not responsible for preparation of PFI

Question 25

During the external audit of Guard Ltd (Guard), you discovered that company policy to obtain three quotes for capital expenditure in excess of £10,000 was not adhered to on a number of occasions.

Requirements
Draft points for inclusion in your firm’s report to the management of Guard, outlining the possible consequences of this deficiency and providing recommendations to remedy the deficiency.

Answer 25

Consequences 24.25

• Non-current assets may not be acquired on the most favourable terms •
• Leading to negative impact on cash flow and profits •
• Quality issues/may not be fit for purpose •
• Use of suppliers who give kickbacks •

Recommendations

• Independent review of quotes by senior management •
• Approval of purchase order/expenditure by senior management not involved in acquisition of non-current assets
• Employees reminded of company policy/training of staff •
• Disciplinary action for failure to adhere to company policy •
• Monitor procedures to ensure compliance

Question 26

List the key differences between the auditor’s report issued in respect of an audit conducted 24.26
under the Companies Act 2006 and an assurance report issued in respect of an engagement
to examine prospective financial information.

Answer 26

Auditor’s report 24.26
Addressed to members/shareholders •
Conducted in accordance with ISAs •
Reasonable/high assurance •
Positive opinion as to whether: •
FS give true and fair view/free from material misstatement –
prepared properly in accordance with relevant reporting framework –
prepared in accordance with CA06 –
Signed in name of senior statutory auditor •
Opinion as to whether directors’ report consistent with FS •

Report on examination of PFI

Addressed to management •
Conducted in accordance with ISAE 3400 •
Restricted distribution •
Limited/moderate assurance •
Negative expression of statement as to whether the assumptions provide a reasonable basis for PFI
Opinion as to whether:
- Forecast properly prepared on basis of assumptions –
- Presented in accordance with relevant financial reporting framework –
Caveat re achievability of results
Signed in name of firm

Question 27

During the external audit of Whinter Ltd your firm has identified a material inconsistency between the directors’ report and the financial statements.

Requirement
State the actions your firm should take and outline any potential implications for the auditor’s report

Answer 27

Discuss reasons for inconsistency with directors •
Ascertain if error/material misstatement arises in FS or directors’ report •
If material misstatement in FS consider whether further audit procedures required •
Request FS/directors’ report corrected •
Document further audit procedures/resolution •
If management refuse to correct, consider whether this casts doubt on their integrity/the reliability of audit evidence

Potential implications for auditor’s report

If error in directors’ report and is:
- Corrected, no impact on auditor’s report –
- Not corrected: –
Include a section headed “Opinions on other matters prescribed by the Companies Act 2006” which describes the inconsistency between the directors’ report and the financial statements
- If there is a misstatement in the directors’ report, include a section headed “Matters on which we are required to report by exception” which describes the misstatement in the director’s report
- If material misstatement in FS and is:
- Corrected, no impact on auditor’s report –
- Not corrected:
Modify audit opinion on FS (a)
Consider if reporting by exception required under CA06

Question 28

Your firm recently conducted the external audit of the financial statements of Oval Ltd (Oval) for the year ended 28 February 20X5.

Oval’s bank requested the audited financial statements
before deciding whether to make a loan to Oval. Oval received the loan from its bank but has defaulted on its first quarterly loan repayment. Your firm’s audit opinion was unmodified.

Requirement
In respect of the bank having relied on the audited financial statements, explain the possible consequences for your firm if it has provided an inappropriate opinion in the auditor’s report on Oval’s financial statements.

Answer 28

Professional negligence claims •
From the bank –
If a duty of care owed

Damages may be payable –
Legal costs incurred –
Firm may be protected by a Bannerman paragraph or –

Material Uncertainty related to Going Concern paragraph –
Professional indemnity insurance premiums may rise –
Subject to greater scrutiny by the regulators (eg, ICAEW) •
Disciplinary procedures –
Fines or withdrawal of registered auditor status –
Loss of reputation •
Loss of clients and key staff –
In extreme cases financial collapse of the firm –
Criminal proceedings if auditor’s report was issued recklessly (Companies Act 2006)

Question 29

You are the audit junior working on the external audit of Bouncer Ltd (Bouncer).

The sales ledger clerk informed you that when he requested the payment of an overdue amount from Mr Wicket, a sole trader, he was told by Mr Wicket that the managing director of Bouncer had personally collected the overdue amount in cash. The managing director subsequently instructed the sales ledger clerk to write off the overdue amount as a bad debt.

The amount is not material to the financial statements.

Requirement
State, with reasons, the actions that should be taken by you and your firm in relation to this matter.

Answer 29

Report to Money Laundering Reporting Officer (MLRO) within the firm •
Money laundering reporting officer to report to National Crime Agency •
Represents proceeds of crime –
Criminal offence if auditor does not report –
No de minimis limit with money laundering –
Appears to be disguising within accounting records –
Do not tip off •
As this might prejudice legal proceedings –
Tipping off is a criminal offence –
Consider impact on other areas of the financial statements •
Reconsider assessment of management’s integrity.

Question 30

Your firm is concluding its audit of the financial statements of Turtle Ltd (Turtle) for the year ended 31 March 20X5. The audit work has identified a number of misstatements, which are individually immaterial, in transactions and account balances recorded in the statement of profit or loss and statement of financial position.

State the actions your firm should take in relation to the misstatements before reaching its audit opinion on the financial statements of Turtle.

Answer 30

Actions firm should take:
Assess whether misstatements are material in aggregate/by nature •
Consider whether there are any other misstatements •
Revise audit plan/perform further procedures •
Communicate misstatements to management/request misstatements corrected •
Perform audit procedures on any changes made

Document:
Amount below which misstatements considered trivial –
Accumulated misstatements –
Conclusion regarding materiality of uncorrected misstatements –
Obtain written representation from management that the effect of uncorrected misstatements is immaterial

Question 31

Your firm is the external auditor of Trigg Ltd and the audit fieldwork has been completed. The engagement partner, Alfie Smith, is performing a review of the audit files and during his review identified that the financial statements show that the gross profit margin had fallen by 5% compared with the previous year.

Requirement
State, with reasons, the additional steps Alfie Smith should take in respect of this issue before concluding his review of the audit.

Answer 31

Ascertain what explanations were obtained by audit team for GP% fall.
Consider whether these are consistent with understanding of client/market.
Inspect evidence indicating explanations were corroborated.
Ensure that risks of error were appropriately tested, such as:
Cut off errors •
Misclassification of expenses •
Overstatement of revenue/understatement of costs

Question 32

External auditor’s reports on the financial statements of listed companies (which are required to apply the UK Corporate Governance Code) have to provide additional information about the audit work performed in line with ISA (UK) 701
Communicating Key Audit Matters in the Independent Auditor‘s Report.

Requirement
List the additional information required to be included in the auditor’s report and state the benefits to the users of the financial statements of having this information

Answer 32

External auditor’s reports on the financial statements of listed companies (which are required to apply the UK Corporate Governance Code) have to provide additional information about the audit work performed in line with ISA (UK) 701 Communicating Key Audit Matters in the Independent Auditor‘s Report.

Auditors of listed companies are required to apply ISA (UK) 701 Communicating Key Audit Matters in the Independent Auditor‘s Report. ISA (UK) 701 requires them to make disclosures about the audit process.

Additional information

Descriptions of the key audit matters.
These are the matters of most significance to the audit.

The description must include:
- the overall audit strategy –
- the allocation of resources in the audit –
- directing the efforts of the engagement team (ISA (UK) 701: para. 13) –
- Why the matter was considered a key audit matter, and how it was addressed, including significant judgements made (ISA (UK) 701: para. 13).
The most significant assessed risks of material misstatement, and the auditor’s responses and key observations in relation to these risks (ISA (UK) 701: para. 13-1).

Specify:
The materiality threshold for the financial statements as a whole –Performance materiality –
An explanation of the significant judgements made by the auditor in determining materiality and performance materiality (ISA (UK) 701: para. 16-1):
- A statement on the audited entity’s compliance with the relevant provisions of the UK Corporate Governance Code

Benefits to users

• Provides greater information, as the auditor’s report is specific to each company •
• Narrows the expectation gap by giving greater information about the work of the auditors •
• Eg, identifying areas where the auditor made critical judgements.