SFQ's

Question 1

The Jumping Bean Company runs a chain of Mexican restaurants. The restaurants are in 26 locations around the country. Professional inventory counters are used to count and value inventory at the year end. As external auditors, you are considering whether you need to rely on the work of these professionals and if so, whether you should.

Explain the factors you need to consider before using them and list the actions you would take before placing reliance on their work. (4 marks)

Answer 1

To decide whether to use the experts, the auditor should:

1. review the engagement’s team knowledge and previous experience of this type of inventory count and valuation.
2. assess the risk of misstatement based on the nature and complexity of the inventory count and valuation.
   review the quality and quantity of other available audit evidence.

If you decide to use the experts, you should:

1. discuss the matter with the management of Jumping Bean – their agreement is important as you are going to be using experts engaged by them.
2. review appropriate documentation to ensure that the experts are appropriately qualified.
3. review the experience and reputation of the experts to ensure that it is relevant and at the appropriate level for this assignment.
4. form a view on the objectivity of the experts – you may consider that because management are employing the experts their independence might be impaired.
5. review the work plans of the experts and assess whether they are adequate and how you might rely on their work and test its adequacy and accuracy.

6.You would inspect some of their previous work and results to help you make a final decision and plan the coordination of your work and the experts’ work.

7.produce the final work plan incorporating the work of the experts as appropriate based on your previous work and conclusions.

Question 2

Your firm has been engaged by the directors of Davis Ltd (Davis) to review an insurance claim for loss of profits that the directors have prepared following a fire at one of Davis’s warehouses. The directors believe that an assurance report provided by your firm will help to accelerate the processing of the claim.

Identify the points, specific to the review of the claim that your firm should include in its engagement letter and explain why their inclusion is necessary. (4 marks)

Answer 2

Points to include in an engagement letter and an explanation of why their inclusion is necessary:

Responsibilities of the firm (auditor)
To review the claim
Responsibilities of Davis (client)
To prepare the claim
To provide written representations and access to information
Limited level of assurance
Expressed negatively
To avoid any misunderstanding and reduce expectations gap
Identify the intended users of the report
Limit liability to unforeseen parties
Agreement to limit liability
Reduce exposure to damages

Question 3

Following a review of interim financial information for Partway Ltd, an independent accountant’s unmodified report has been issued. The report includes the following:

“A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.*
Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not give a true and fair view of the financial position of Partway Ltd as at 30 April 2022 and of its financial performance and its cash flows for the six-month period then ended in accordance with International Financial Reporting Standards…”*
Describe the level of assurance that has been provided by this statement and explain how and why it differs from the level of assurance provided by an external auditor’s report on annual financial statements. (3 marks)

Answer 3

Level of assurance provided by the review:

Limited/moderate assurance expressed negatively
The auditor is satisfied that the subject matter is plausible
How it differs from the annual audit:

An annual audit provides a high level of assurance expressed positively (ie, in our opinion gives a true and fair view).
The auditor is satisfied that the subject matter conforms in all material respects with suitable criteria.
Why the level of assurance differs:

The level of assurance is determined by the level of work undertaken.
The scope of a review is substantially less than that of an audit.
A review does not include audit procedures such as tests of control and tests of detail.

Question 4

Describe the role of the ethics partner within an external audit firm. (3 marks)

Answer 4

Role of ethics partner within an external audit firm:

Responsible for adequacy of firm’s policies and procedures regarding integrity, objectivity and independence
Responsible for firm’s compliance with FRC Ethical Standard
Responsible for effectiveness of communication on ethical matters to partners and staff
Provides ethical guidance and advice to individual partners and teams
Gives consideration to whether policies and procedures are properly covered in training
Provides guidance where difficult and objective judgement needs to be made or a consistent position reached
Assesses implications of any breach of FRC Ethical Standard
Determines whether any safeguards can be put in place or whether there is a need to resign from engagement

Question 5

State the key purposes of:

an engagement quality control review; and
monitoring (‘cold’ audit file review).
(3 marks)

Answer 5

Key purpose of engagement quality control:
Provide an independent check regarding the validity of the firm’s audit opinion by:
discussion of significant matters with the engagement partner review of the financial statements and proposed auditor’s report.
review of selected documentation relating to significant judgments.
evaluation of conclusions reached.
Particularly where there are increased risks associated either with the:
client (eg, a listed client); or
objectivity of the firm
Key purposes of monitoring (cold review):
Represents a continuing part of the firm’s quality control procedures
Ensure that the firm’s policies and procedures are operating effectively and are complied with
Assess the firm’s compliance with ISAs (UK)
Identify areas where changes to firm’s policies and procedures are needed
Identify where additional training is required
Assess the effectiveness of review procedures