SFQs Flashcards
Ethical issue - confidentiality + procedures
Confidentiality
• Conflict of interest for audit firm
• Data and Lodge may perceive threat of disclosure/use of information
• Difficult to act in best interests of both clients
Procedures
- Ensure staff are aware of confidentiality issues
- Staff to certify they are aware of procedures
- Obtain informed consent of both clients/inform both clients
- Use different partners and teams
- Independent review of arrangements for ensuring confidentiality maintained
- Chinese walls
Request for branch accounts
- Jason is a shareholder only, not a director
- Has no right to information other than annual report
- Should be referred back to company
- Seek permission from directors to release
- Has right to raise question at AGM
Mangement threat + Self Review
¥ Management threat
¥ Self review threat
¥ Firm may be susceptible to pressure for fear of losing work
¥ Lack objectivity when checking VAT
¥ Different staff should be used for VAT work and audit
Conflict of interest + advocacy
¥ Conflict of interest
¥ Advocacy threat
¥ Either company may be uncomfortable with arrangement and exert pressure
¥ Beta could exert pressure re your knowledge of customer
¥ Separate audit partners
¥ Separate audit teams
Ethical issues - overdue fees
o Overdue fees constitute a self interest threat
o Issue of unqualified report this year may increase chance of collecting overdue fees
o If not settled and fees are significant or in dispute then consider resigning
o If do not resign apply appropriate safeguards such as review by independent partner
o Notify ethics partner
o Consider whether it is appropriate to invite clients to as many corporate events to ensure independence maintained – hospitality
Partner is a trustee of previous client
- Document considerations in continuing to act/annual reappointment consideration
- Apply safeguards to mitigate familiarity threat and self interest threat
- Former trustee should not be individual responsible for the audit
- Second partner review
- Ensure fees do not exceed recommended threshold
Limitations of IC
Cost - The cost of an internal control may exceed the benefit that the IC would yield.
Collusion - Controls could be overridden by two or more people working/colluding together to perpetrate fraud.
Human element - Most controls are only as good as the people who implement them. If a human makes a mistake implementing a control (e.g. keeping a password secure), the control may be rendered ineffective.
Unusual transaction - Controls are there to deal with the usual transactions of a business. An unusual transaction may not fit into the normal routines and hence may not be detected or prevented.
Documentation from the company for Audit plan to understand the company
- Minutes of meetings
- Statutory material filed at Companies House, etc
- Prior years’ accounts
- Budgets and forecasts
- Management accounts and reports
- Policy and strategy documents
- Accounting, procedures and controls manuals
- Internal audit reports
- Organisation charts/job descriptions
- Marketing and sales literature
Five elements
- Three parties (Responsible party e.g. the directors; practitioner e.g. the external auditor; user (e.g. an audited company’s members)
- Subject matter (e.g. the Financial Statements)
- Suitable criteria (e.g. International Financial Reporting Standards)
- Sufficient and appropriate evidence (any audit evidence provided)
- Written report (e.g. the audit report)
Helping audit client to design controls
The ethical threat would be one of self-review (Ethical Standard 1) as we will be auditing the subsidiary after being involved in the design of the controls.
- a company with a 30 November 2011 year end, you have discovered that one purchase invoice is dated 1 December 2011, but gives a delivery date of 30 November 2011. What additional work would you carry out in relation to this matter?
- Examine GRNs to determine date of delivery
- If pre-year end ensure that included in purchase ledger pre-year end
- If post-year end ensure that included in purchase ledger post-year end
- If pre-year end ensure that it is in closing stock, or was used pre-year end
Only 22 of the sample of 30 circularised have replied. What alternative audit procedures could you carry out for those debtors who did not reply?
- Check after date cash received
- Agree this to the bankings/bank statement
- Agree to the goods despatched note/contract
- Telephone/fax the debtors who have not replied
- Inspect correspondence for evidence of disputed amounts
Identify FOUR documents that would be included within an audit firm’s Permanent audit file for a client and set out the requirements for custody and retention of documentation.
Answers could include:
• Original engagement letters
• Memorandum and articles of association (both must be identified)
• Previous years’ signed financial statements
• History of the client
• Legal documents that may include prospectuses, sales agreements
• Process notes
Answers could include:
• ICAEW requires that firms have a document retention policy
• Registered Auditors required to keep all working papers required by auditing standards for at least six years from end of accounting period to which they relate
• Confidentiality of assurance work must be maintained and hence a firm must have good security procedures over working papers (paper documents to be secured in locked premises; electronic working should be protected by electronic controls)
- Identify and explain TWO assertions that relate to the testing of trade and other payables.
Completeness- Ensuring that all liabilities are included
Rights and obligations - Confirming that all liabilities are bona fide owed by the company.
- Gonzo Ltd provides a warranty at the point of sale to its customers. Under the terms of sale, the company undertakes to repair or replace resulting from manufacturing defects that become apparent within five years from date of sale. Accordingly, a warranty provision is recognised in the accounts based upon past experience of warranty claims to date. List the audit procedures you would perform in order to form a view on the amount of the provision.
- Review terms of warranty agreement
- Ascertain basis of calculation and check calculation
- Ascertain warranty costs incurred in year
- Ascertain costs incurred in post year end period
- Compare previous experience of costs incurred and provisions made
- Enquire and confirm any significant changes in product sales mix
- Enquire whether any significant quality problems with particular products
- Analytical review of year on year figure
- Management representation in respect of adequacy of provision
